Europe’s greatest unification project the Eurozone is the highest form of economic integration yet it has been going through rough patches in the past decades with Greece, Ireland, Italy and Portugal hit with sovereign debt crisis. In fact, Europe is not yet out of the woods while African embarks on its own: the Continental Free Trade Area (CFTA), writes Brook Abdu.
While the flamboyant Donald J. Trump, the president of the United States of America, is pushing towards the dissolution and renegotiation of the North America Free Trade Agreement (NAFTA) among the US, Canada and Mexico, 44 African nations took the milestone step of signing an agreement to establish a free trade area in the continent. And Ethiopia is among the signatories of this African milestone accord which aims at integrating the country to the highest level of political unity.
The Minister of Trade, Bekele Bulado (PhD), represented Ethiopia to sign the agreement in Kigali, Rwanda.
The agreement, which was conceived in 2007 in Addis Ababa at the Assembly of the 18th Heads of States and Governments, finally succeeded in having 44 countries ink the accord in Kigali, Rwanda on Wednesday March 21, 2018.
Its aspirations firmly placed on the Agenda 2063 of bringing about whole political integration in Africa, the CFTA has multiple objectives. According to the African Union, the objectives of the CFTA include creating a single continental market for goods and services, with free movement of business persons and investments, and thus paving the way for accelerating the establishment of the Continental Customs Union and the African customs union, expanding intra-African trade through better harmonization and coordination of trade liberalization and facilitation regimes and instruments across Regional Economic Communities (RECs) and across Africa in general, resolving the challenges of multiple and overlapping memberships and expedite the regional and continental integration processes, and enhancing competitiveness at the industry and enterprise level through exploiting opportunities for scale production, continental market access and better reallocation of resources.
Although the negotiation towards the CFTA agreement were expected to begin and the final agreement and implementation completed by 2017, the continental body managed to do so only on Wednesday, which is also said to be a necessary move and courageously made by the heads of states of the continent.
One reason for the introduction of the free trade area in the African continent is the very limited and small amount of trade exchanges among the nations of the second largest and second most populous continent on the globe following Asia. A data by the United Nations Conference on Trade and Development (UNCTAD), in reference to the time between 2010 and 2015, indicates that African nations trade only 10 percent of their produce among themselves.
“This is very dreadful,” regrets Berihu Assefa (PhD), Associate research fellow at the Ethiopian Development Research Institute (EDRI). For him, the move towards bringing about the CFTA is a delayed one as, “there is a huge potential in the continent which needs to be unleashed by demolishing barriers both in terms of tariff and non-tariff barriers to trade that is hindering the trade in goods and services.”
Following the independence of most of the continent in the 1960s, African countries never turned to their neighbors for trades. To the most part, African countries remained hooked up to the links formed during the colonial era to European markets and tasked themselves to supplying raw materials to the industries of their colonizers. And experts argue that this has not healed to date.
Barack Obama, former US president, during his visit to Ethiopia and the African Union in 2015 emphasized that Africans should focus on intra-African trade instead of fixating on markets beyond the Mediterranean.
“The biggest markets for your goods are often right next door. You don’t have to just look overseas for growth, you can look internally… it shouldn’t be harder for African countries to trade with each other than it is for them to trade with Europe and America,” Obama was quoted saying.
In a continent of more than 1.2 billion population and a GDP of around 3.4 billion dollars, according to the AU, the introduction of a free trade area is believed to increase the kind of trade among the nations of the continent apart from its contribution to the intra-Africa trade exchanges.
According to a research by the UN Economic Commission for Africa (UNECA), between the years of 2010 and 2015, oil represented half of Africa’s exports to the non-African countries while manufactured goods accounted for only 18 percent of the total export.
But, the amount of manufactured goods traded among African countries stands at 43 percent of the total trade volume.
The introduction of the CFTA is also said to be instrumental in diversifying the less complementary productions that the African countries have, although some see this as a challenge for the successful implementation of the CFTA. Many of African countries including Ethiopia export commodities with little or no value addition; and hence it apparent that there will be losers and winners of the game.
“There are countries with competitive advantages in different areas of trade; for example Kenya might be advantageous when it comes to agro processed export items while Ethiopia has a limitation in that department. But, when it comes to light manufacturing products and commodities, Ethiopia has clear advantage. Therefore, the focus needs to be on the sum positive; on the average gain of each party by implementing the FTA,” asserts Berihu.
Sharing Berihu’s view, for Gedion G. Jalata, CEO of Center of Excellence International Consult, the introduction of the CFTA in Africa helps to enhance competitiveness by reallocating resources to most production sectors. This in turn boosts the intra-Africa trade.
“The intra-Africa trade is very limited compared to that of Europe which stands at 61 percent and Asia’s 70 percent. If they trade together and bring integration soon, they can resist the influence of globalization as it is size that matters in globalization,” Gedion opines.
Although the two experts firmly argues that the pros heavily out weighs that of the cons, UNCTAD’s report indicates that the cut in tariffs which the FTA requires will make African countries lose a combined 4.1 billion dollars. However, the report also asserts that these economies will also gain four folds of what they lose in the long run.
Even though the benefits are said to be immense, the FTA is also feared to create unfair distribution of benefits which it generates. This is a concern that the trade unions in Nigeria raised which President Muhammadu Buhari heeded and excused himself from the signing in Kigali. Other ten countries also boycotted signing the agreement.
Buhari said he cancelled his trip to Kigali to “allow time for broader consultations” following the warning by the Nigerian National Congress that the CFTA is a “renewed, extremely dangerous and radioactive neo-liberal policy initiative”.
The CFTA requires African countries to eliminate tariff on 90 percent of the goods and services with the exception of those termed “sensitive items” which remain to be identified.
The CFTA, the biggest trade agreement since the establishment of the World Trade Organization (WTO), is planned to spring push the continent’s intra-Africa trade to 52 percent by 2022 from what it was in 2010.
Apart from tariff, the agreement includes elimination of non-tariff trade barriers including quota and border delays.
“As the main requirement for the implementation of the CFTA, the elimination of all trade barriers including tariffs will enhance the flow of quality FDI as many investors demand other markets in which they can sell their products apart from the home country of their investments,” says Berihu.
Berihu observes that the CFTA will no doubt help in the attraction of quality FDI.
But, the implementation of the FTA will not be a walk in the park, according to both experts.
The first one is capacity limitation to implement the CFTA and the compliance to the rules of origin which require the inputs for the manufactured goods traded among the CFTA signatories are sourced from the other signatory countries.
“This no doubt is a challenge since most of African countries have poor human resource capacity,” Gedion indicates.
But, this challenge is not observed by Berihu. He says that the countries are required to implement the FTA only commiserate with their capacity and which they can develop through time.
Reasoning that the establishment of the European Union took 50 years, Berihu says the CFTA can be implemented by the capacity that the African countries currently have and says it is doable.
Another observed challenge is security issues which are concerning not only for the FTA but also for the wellbeing of the citizens of the continent.
Infant industries are also feared to be dwarfed by the penetration of products from more advanced and competitive African economies as enough products enter a country with no barriers hindering them. This is said to be an adverse condition to the establishment of industries that can make the same or complementary products with the imported ones. This in turn will hamper employment because of the focus of investors will turn to capital intensive products than labor intensive productions.
Although 44 countries have already signed the agreement to establish a free trade area, it does not mean that it will directly go into effect. African countries will now sit for negotiations for the slow by slow decrease in tariffs before eliminating them. There will also be discussion on the amount of tariffs to be levied uniformly among the FTA countries.
The introduction of the FTA is the first step in economic integration. For the attainment of Agenda 2063, it has to go through different stages. The remaining stages in the economic integration are customs union, common market, and full economic integration.
Customs union requires the removal of tariff barriers between members, together with the acceptance of a common external tariff against non-members.
Common market, on the other hand, involves the growth of the FTA from just tangible goods, to include all economic resources by eliminating barriers to allow the free movement of goods, services, capital, and labor.
The final economic integration stage deals with the blending of monetary and fiscal policies of the countries (monetary union). This will finally grow to full economic integration.
But, it is not a must to follow the above stages. For instance, apart from the agreement to establish the CFTA, 27 countries signed to allow free movement of people among them. Hence, experts hope that, although it takes some time, it will soon get into implementation with the inclusion of the remaining 11 African countries.
“I believe it is even delayed beyond necessary,” Berihu stands. “When is then the right time – it is not something we need to drag backwards as there will not be growth if they do not expose themselves for competition.”
The pushing factors for the quick implementation of the CFTA in Africa, according to Gedeon, is the presence of regional establishments like COMESA, ECA,ECOWAS and IGAD which will make it easy to bring about the integration soon.
Sooner or later, the CFTA will be implemented after which the winners and losers in the game will be identified.