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BusinessCFTA: What is in it for Ethiopia?

CFTA: What is in it for Ethiopia?

It would have been a dream come true for the founding fathers of the Organization for African Unity (OAU) had they been alive to witness the birth of the African Continental Free Trade Area (CFTA). Indeed, they would have loved to see the moment that the CFTA agreement was signed by almost all of the nations in the African continent in Kigali, Rwanda; and later ratified by 22 nations so that it would enter into force. After the signing of the accord by the African nations exactly a year ago, the Chairperson of the African Union Commission Moussa Faki Mahamat followed the parliamentary ratifications process across the continent, one by one, tweeting his way through from the first ratification in Rwanda to most recent one in Gambia.

This is a rather successful journey for a continental body like the African Union within the 56 years of its history and it is expected to leap frog the organization towards its ambitious 2063 agenda, a time when the African Union would have had a century-old legacy. Even though the CFTA came two years later than the original plan of putting it into action in 2017, the move was commended internationally including by the UN secretary general, António Guterres.

As outlined by the African Union, the objectives of the CFTA include creating a single continental market for goods and services, with free movement of goods, people and investments; and thus, paving the way for an accelerated establishment of the Continental Customs Union, which would further expand intra-African trade through better harmonization and coordination of trade liberalization and facilitation regimes and instruments across Regional Economic Communities (RECs) and the continent in general. Resolving the challenges of multiple and overlapping memberships and expediting 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.

For this continental free trade area to come into force, considerations like boosting intra-nations trade within Africa were taken since there is a very small trading volume within the continent both in goods and services.

Talking to The Reporter after the signing of the agreement in March 2018 in Kigali, Berihu Assefa (PhD), Associate research fellow at the Ethiopian Development Research Institute (EDRI), commented that the agreement is even a delayed one because, “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.”

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Despite African nations’ craving for this continental free trade area since their independence in the ‘60s, they never had the commitment to follow through, experts argue; rather African countries have chosen to ignore their neighbors and opted for trade with their former colonies.

The new CFTA is said to bring about much more benefits to the African nations if they remove trade barriers, a 2015 document by the United Nations Conference on Trade and Development (UNCTAD) foresees. “The removal of tariffs on intra-African trade could raise their share in total African trade volume from about 10.2 percent to 15.5 percent from 2010-2022. And with  enhanced  trade  facilitation  measures,  the gains  would  double  to  reach  21.9  per  cent,” the document projects.

In an interview with The Reporter last week, Endalkachew Sime, the Secretary General of the Ethiopian Chambers of Commerce and Sectoral Associations, said that the considerations for the establishment of this continental free trade area was to tap into the 1.2 billion people market and to create better opportunities for the continental economic development.

“The African Continental Free Trade Area is all about facilitating markets. It facilitates market for goods and services. For instance, if you establish a factory in Ethiopia, you target 110 million people. This free trade area expands your market to 1.2 billion,” Endalkachew observed.

This is also shared by Mamo Esmelealem Mihretu, Ethiopia’s Chief Trade Negotiator, who says that such initiatives bring about the potential to attract better investment to the country and the country will get more export revenue because of the access it has to a wider market.

Being a pioneer in the establishment of the African Union, Ethiopia is also playing a leadership and a pioneering role in the process of forming this continental free trade area, which Mamo says is expected and important.

“The role Ethiopia is playing is expected and benefitting both in terms of political and diplomatic realms in addition to the immense economical significance it carries with it,” Mamo asserts. “The CFTA gained credibility for Ethiopia supported it and played a front runner role.”

In addition to these, Mamo observes that the CFTA is a learning environment for Ethiopia which is in the process of acceding to the World Trade Organization (WTO).

“As the subjects of negotiation both for the CFTA and the WTO are the same, the experience from this will help us in our negotiations for WTO accession,” Mamo said indicating that trade in goods, services as well as trade related to infrastructure are all negotiation subjects which are relevant in the WTO accession process.

Mamo is of the view that the negotiation for the AfCFTA was hastened because of the lesser impact the agreement would have on the country, while the perceived benefits are far higher; perhaps much higher than the feared threats.

Ethiopia’s goods import from African countries account only for 4 percent of the total import bill of country, while its export to African country stands at 20 percent. The service sector export even goes beyond, given the continental reach of Ethiopian Airlines. Hence, Ethiopia is on the winning side of the negotiation, Mamo observes.

Hence, the lesser negotiation moment taken by the CFTA is attributed to the lesser impact it has on Ethiopia, he argues. Even the country has a better competitive edge when it comes to trading with African countries.

The other factor that induced the country to jump onto the CFTA bandwagon in such a short time despite its more than a decade-long negotiation to accede to the WTO is the flexibility that the CFTA offers when it comes to tariff barriers. The CFTA is creating a free trade area with the existing tariff while the WTO puts a tariff ceiling which could not be changed after the accession.

“Ethiopia has to be a founding member of the CFTA as we do not want the repeat of the mistake made during WTO’s formation. If we do not join now, we are going to accede in the future, which proved to be a challenging and hectic task with the WTO; we won’t have a table to shape it,” Mamo said. “We have a better preparation when it comes to CFTA and it promotes our national interest – we have to lead as we are the base for pan Africanism.”

For him, CFTA makes absolute economic sense and it advances the country’s foreign policy.

Mamo also envisions the future to enable Ethiopian experts to go to other countries and work there through an expanded CFTA, which will also apply for other nationalities to come here and work. As the trading in goods and services has exclusion options, Ethiopia can exclude some goods from the CFTA and open up in a long period of time. He mentions South Africa which exports vehicles. If Ethiopia does not want it to be included because of different factors, it can exclude it from the list of items agreed in the CFTA.

But, the retreat by major economies like Nigeria from the CFTA is seen as a setback for this continental ambition. But, for Mamo, it is only a matter of time until Nigeria joins the CFTA. The retreat was caused by political factors as the country was on election at the time of the signing.

What Ethiopia is doing is having a consistent and coherent trade policy, Mamo asserts. The trade policy is consistent with other policies in the country like the investment policy. On the other hand, its actions are coherent with other trade engagements like the regional integration that the country leads in East Africa, the CFTA and the WTO. 

Even though the CFTA comes along with better opportunities, it also comes along with challenges, according to Endalkachew. He raises the issue of source of origin as other countries will send goods to one of African countries with lower tariffs and reexport them to those with higher tariffs within the CFTA to avoid direct exposure to the tariffs within those destinations.

“For example, if Ethiopia levies a tariff of 30 or 35 percent on a specific good manufactured in China and Kenya levies 20 percent for the same type of goods, they will export to Kenya and redirect it to Ethiopia. The origin of the good has to be carefully assessed,” he warns.

The negotiation is now done, what next, questions Francis Mangeni, Director of Trade and Customs at the COMESA Secretariat in a commentary he wrote for The Reporter. He advises that, different documents especially those concerning tariff need to be produced.

“Rules of origin and tariff negotiations need to be completed. Tariff schedules should be produced. A mechanism for addressing non-tariff barriers is also required. Some Regulations and Guidelines are also needed, in areas such as infant industries and export processing zones.

“Other areas to be completed include operationalization of the Africa Trade Observatory, which has already been launched; and establishment of continental payment systems, perhaps building on the existing COMESA and SADC regional payment systems. The very good news is that work in all these other areas has started and is proceeding well,” Mangeni indicates.

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