AfCFTA: Pains, gains of a continent’s trade agreement
African leaders, on Wednesday, March 21, 2018, gathered for an extraordinary summit of the African Union (AU) in Kigali, Rwanda, to sign an agreement establishing the African Continental Free Trade Area (AfCFTA). Nigeria, however, was absent. On Sunday, March 18, the Federal Government announced that President Muhammadu Buhari had cancelled the planned trip, “to allow more time for input from Nigerian stakeholders”.
The decision to establish the free trade area, expected to be the world’s largest in terms of membership since the creation of the World Trade Organisation (WTO), was the fallout of the 18th Ordinary Session of the AU in 2012, where member nations agreed to float the initiative by 2017.
According to analysts at Afrinvest Securities, AfCFTA would create a single continental market for goods and services through the reduction or possible elimination of trade barriers such as tariffs and import duties. It would also allow free movement of goods, services and people between member states, with the aim of boosting regional business integration and growth.
By the estimation of the United Nations Conference on Trade and Development (UNCTAD), intra-African trade is among the lowest in the world at 16 per cent of total regional trade. Of the total continental trade, regional economic communities, like ECOWAS and the Southern African Development Community (SADC), account for 80 per cent, while five countries – Algeria, Cote d’Ivoire, Egypt, Nigeria and South Africa – contribute over 60 per cent of all intra-African trade volumes.
The United Nations Economic Commission for Africa (UNECA) estimates that with the implementation of the deal, AfCFTA could boost intra-African trade by $35 billion by 2022 and also lead to six per cent rise in continental export.
According to an independent assessment carried out by UNCTAD in February 2018, based on a pessimistic scenario of exemption of sensitive products from liberalisation, AfCFTA will buoy intra-African trade by 24 per cent, shrink trade deficit by 3.8 per cent, boost growth and employment by one per cent and 1.2 per cent, and contribute $10.5 billion to economic welfare.
A more optimistic scenario, which assumes full implementation, estimates that AfCFTA would increase economic welfare by $16.1 billion, increase GDP growth by 0.7 per cent, reduce unemployment by 0.8 per cent, boost intra-African trade by 33 per cent and halve regional trade deficit.
These attractive fundamentals, however, are yet to be discounted by differing and uneven macroeconomic developments, as well as huge infrastructure gaps that exist among member countries of the fledgling economic initiative.
UNCTAD, in the same report, highlights some short and long-term challenges of adopting a free trade area in Africa. Perhaps, that was where the few dissent to the deal held strongly.
In the aftermath of trade liberalisation, many participating economies may struggle to grapple with the realities of short-term pains of adopting free trade, such as reduced government revenue from import tariffs, which account for significant proportions of government budgets and changes in different sectors of the economy, possibly leading to spikes in unemployment and underemployment.
For instance, UNCTAD estimates that between 7.2 per cent and 9.1 per cent of current revenue, about $3.2 billion and $4.1 billion of tariff revenue, would be lost, depending on the scale of implementation.
The development would have to be endured until the long term, when countries would have greater incentive to adopt specialisation strategies for the production of certain goods for which they have competitive advantage, thus allowing for better use of economic resources.
This calls to question the uneven growth strategies in the continent’s economies, as well as leadership commitment, which have been marred by corruption scandals, rather than the pursuit of real development.
Again, trade liberalisation would lead to lower import outside the continent, as well as lower consumer prices, while also providing a broader choice of products with improved quality. Furthermore, local companies and producers would have unrestricted access to bigger markets and as such gain from economies of scale.
But the ensuing competition, left unchecked, could be cause for concern, as competitive pressures would require companies to become more efficient in resource allocation and innovation. This is the case of the depth of individual countries’ infrastructure, technological advancement and resource endowment.
Currently, 10 of 55 AU member states: Zambia, Nigeria, Botswana, Lesotho, Namibia, Burundi, Eritrea, Republic of Benin, Sierra Leone and Guinea Bissau, declined to sign the treaty.
South Africa delayed assent, to allow local agencies carry out necessary reviews. President Muhammadu Buhari also announced that Nigeria would not append its signature due to concerns about dumping, and protests from manufacturers and labour unions seeking greater stakeholder consultation.
The reality is: the country lacks capacity technologically and infrastructure wise. It also has a cache of hiccups and mix-ups in its regulatory frameworks. Unprepared, the economy will be overwhelmed and the local manufacturing sector might not be able to withstand the competition. Besides, technological advanced countries outside the continent could hide behind the agreement to undermine the interest of member countries. Skepticism towards the deal stemmed from fear of exploitation of the free trade corridor by competitive Asian countries.
Nigeria’s sudden withdrawal came as a surprise, given its leading role in the negotiations. Its chief negotiator, Ambassador Chiedu Osakwe, chaired the 55-member talk forum, while the Minister of Industry, Trade and Investment, Dr. Okechukwu Enelamah, chaired the African Ministers of Trade (AMOT) meeting, which approved the framework agreement establishing AfCFTA.
Buhari had declared his support for the agreement at the 30th Assembly of African Union (AU) Heads of State in January, saying: “In a rapidly changing global economy with much uncertainty, we believe that the establishment of a continental free trade area would provide Africa with tremendous opportunity to achieve significant growth driven by intra-African trade.”
Analysis by Afrinvest Securities notes: “Given the importance of the regional market to Nigeria, we think the country’s no-show at the AU meeting could be counterproductive. Reported merchandise trade (imports + exports) between Nigeria and Africa reached N2 trillion ($6.5 billion) in 2017, although actual numbers could be much higher due to the huge volume of reported smuggling activities in Nigeria’s southern borders (petroleum products and processed food) and northern borders (agricultural commodities and petroleum products).
“Based on reported trade figures, Nigeria has the upper hand in terms of trade balance with a trade surplus of N1.2 trillion or $4.2 billion with its African neighbours in 2017. The region is also the largest destination for Nigeria’s manufacturing export at 38 per cent of total manufactured goods exported in 2017, amounting to N108.5 billion or $355.7 million, and more recently, solid mineral exports at 53.5 per cent of total, amounting to N22.6 billion or $74.1 million.”
The analysis notes that the strategic importance of the regional market will get Nigeria back to the negotiating table, but the country might push its luck too far, if other regional rivals unite before it joins.
With the emergence of President Donald Trump of the United States of America, nationalism and protectionism has assumed a new dimension, with renegotiations, cancellations of agreements, and consequent repercussions.
Concerns of a possible trade war between the U.S. and China increased, following an announcement by Trump to impose tariffs on up to $60 billion worth of Chinese imports, especially in the aerospace, information and communication technology and machineries categories.
For President of the African Export-Import Bank (Afreximbank) Dr. Benedict Oramah, AfCFTA will lead to Africa’s economic development and bring about a better future for the continent.
Speaking on ‘Financing Intra-African Trade’, recently, Oramah said that as part of the drive to promote intra-African trade and regional integration, Afreximbank identified several countries serving as hubs for trade among African states. He said the hubs were already playing significant roles in their sub-regions by supporting cross-border trading and were critical in AfCFTA implementation.
He said these include South Africa in Southern Africa; Nigeria and Cote d’Ivoire in West Africa; Kenya in East Africa; and Egypt in North Africa. Unfortunately, two of the major sub-regional hubs (South Africa and Nigeria) are yet to give assent to the deal.
He said Afreximbank is already working on the establishment of export trading companies that would aggregate products from small traders for export across the continent and beyond. The operation of such companies would remove the need for small individual traders to try to export products by themselves.
He also said the bank signed a $1 billion Memorandum of Understanding with the Export Credit Insurance Corporation of South Africa for a South Africa-Africa Trade Promotion Programme, aimed at expanding trade between South Africa and other African countries. A similar programme was signed with Egypt worth $500 million. The financial expert added that the bank has also introduced an African Guarantee Programme, to help African businesses obtain trade financing.
President of South Africa, Cyril Ramaphosa, at the event in Rwanda, said that although the AfCFTA had been long in coming, it offered a lot of hope for the continent.
Commenting on Nigeria’s sudden change of heart, Fellow of the Chartered Institute of Bankers, Mr. Bassey Ibor, said: “It will be hard to say Nigeria declined to sign or pulled out of the agreement. What Nigeria simply said was that we need some time to consult and get the views of learned stakeholders before we sign. This is not the final thing.”
Ibor, also a lecturer at the University of Calabar’s Department of Banking and Finance, said: “There are people that are going to be impacted directly by this agreement, and every Nigerian will be impacted ultimately. The commerce and the industrial sectors will be directly impacted. And if they are not part of the consultation, you will be signing an agreement that will be protecting the interest of the citizens of other countries and not your own people. So, you need to bring them in and find out what their position is on the issues that are contained in the agreement. The agreement is essentially about a common trading environment where you have free entry and free exit. And you should find out what the impact will be on Nigeria. The whole thing is simply about consultation.
“Secondly, it simply shows that the private sector in Nigeria is beginning to have impact on the direction of government policy. For government to suspend an agreement on which it has gone very far and say, ‘we need to consult, based on the presentations of the private sector’, it is simply an indication that the private sector is beginning to be recognised or acknowledged as a worthy partner in the development process. What we should do is ask government to expedite the process of consultation, so that we can know exactly the final position of the country in respect of the agreement.”
On whether Nigeria should sign the treaty or not, Ibor said: “As long as it is protective of the interest of the country, yes. If there is any clause in the agreement that does not protect us, then we don’t need to sign it, or we can ask for an adjustment. For instance, if we go ahead to open our trading environment for everyone to come in and go, what is the impact on our emerging industries?
“We need to see what you are bringing into the market. But if it is generally free for everybody, it won’t be fine. As long as the policy effort by the government is well intentioned, the industries are revived, commerce resumes, industrial development takes off and this will not hinder it, it will be fine. One of the challenges we had before was that we opened our doors to so many things coming in from all over the world. And before we knew it, Nigeria had become a dumping ground and our own high quality products were dropped. So, we should not go into another agreement that will bring us back to the state we are trying to get out from.”
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