Bringing the CFTA About: Key Factors for Success
How can African negotiators and policymakers ensure that the CFTA will be successful? With the imminent release of the latest edition in the Assessing Regional Integration in Africa report series, this article draws out key messages and recommendations to inform the design and implementation of a “win-win” CFTA.
The Continental Free Trade Area (CFTA) is the first flagship project of the African Union’s (AU) Agenda 2063 and a key initiative in the industrialisation and economic development of Africa. It is an ambitious endeavour spanning 55 member states across a diverse continent. Matching this ambition with implementation will be a critical challenge, which is why the report Assessing Regional Integration in Africa VIII (ARIA) turns to the question of how to “bring about” the CFTA. For this, the ARIA series is well placed, with a history of driving the agenda on regional integration in Africa. Notably, the recommendations of ARIA V helped trigger the decision to launch the CFTA negotiations alongside the adoption of the AU’s Action Plan for Boosting Intra-African Trade (BIAT). In keeping with this history, we hope ARIA VIII will be effective in shaping the implementation of the CFTA.
This article summarises the key messages and policy recommendations of ARIA VIII that aim to inform the design and implementation of a “win-win” CFTA. We commend them to African negotiators and policy makers, to stakeholders at all levels, and to our development partners.
A win-win approach to the CFTA through the BIAT Action Plan
Sharing the benefits of the CFTA is important, not only for reasons of equity, but also to ensure that the agreement actually works for countries at different levels of development. Trade agreements that are not win-win tend to remain unimplemented or unravel because partner countries have little interest in their implementation.
African countries span a diversity of economic configurations and are accordingly expected to be affected by the CFTA in divergent ways. There is, however, as much variety within as there is between African countries. As such, it will be as important to ensure that the wide array of stakeholders within and between African countries – and especially vulnerable or sensitive groups – all benefit from the CFTA.
Fundamentally, the CFTA is expected to generate significant economic opportunities. Liberalising trade between two or more countries generally has positive welfare effects for those countries and leads to economic growth and poverty reduction. Empirical analyses of the CFTA identify such gains: Mevel and Karingi estimate that intra-African trade will increase by 52.3 percent (US$34.6 billion), compared to a baseline scenario without a CFTA, by 2022; Chauvin et al. estimate large and positive long-run impacts, with the CFTA boosting Africa’s welfare by 2.64 percent by 2027.
Certain countries may require further support in realising these opportunities. The BIAT Action Plan provides the framework that member states can use to prioritise the policy reforms required to derive the full benefits of the CFTA. The BIAT Action Plan was endorsed by the same 2012 AU Assembly decision that decided to establish the CFTA and identifies key flanking policies such as trade facilitation, productive capacity, trade-related infrastructure, and trade finance (Box 1).
Box 1. Summary of the seven priority clusters of the Boosting Intra-African Trade Action Plan
The implementation of the BIAT Action Plan is key. This will require an implementing institutional structure, which may combine with that of the CFTA to avoid institutional duplication; a continental framework for monitoring and evaluation, which can also be combined with the CFTA’s; and resources for the BIAT initiatives.
Tariff revenue and the effects of structural adjustment on vulnerable groups
The CFTA will reduce tariff revenues collected by African countries on intra-African trade. However, tariff revenue losses due to the CFTA are estimated to be modest and can be more equitably balanced across countries by allowing for flexibilities, such as exclusion lists, though these exclusions must not be so large as to undermine the gains from the CFTA.
The CFTA will imply structural adjustment costs in the short run as economies undergo structural change, with factors of production shifting across sectors to align with new trading opportunities and competition. Special measures are required for vulnerable groups that could be hurt by such adjustments. The CFTA and its accompanying measures should ensure that these groups share the gains of the CFTA and are protected where necessary.
Smallholder farmers (around 53 percent of Africa’s agricultural producers) can be supported by measures to promote their integration into larger value gains, such as simplified rules of origin requirements and help for them to meet sanitary and phytosanitary export standards. Such farmers may also require capital and reskilling to focus their production on export opportunities.
By reducing tariffs, the CFTA will make it more affordable for informal cross-border traders to operate through formal channels. The CFTA can further support this group with trade facilitation and trade information measures, along the lines of the Simplified Trade Regime implemented in COMESA, which simplifies clearing procedures and the requirements to qualify for preferential duties for a common list of products.
Women can be supported through their explicit involvement in the design and processes of the CFTA, including through national consultations and by including more female negotiators. In Africa, women account for approximately 70 percent of informal cross-border traders and can be supported here with improvements to storage facilities, illuminated border areas, and hygiene facilities. Women can also benefit from initiatives to connect female agricultural workers to export food markets.
For youth, the CFTA will help to drive the structural transformation that is required to generate new job opportunities, absorb new entrants into the labour force, and shift African economies from capital-intensive commodities towards labour-intensive sectors. Supporting Africa’s youth will require improved access to credit and initiatives such as tech incubators and accelerators, as well as revamped policies in education and skills development.
As a second-best option to the abovementioned accompanying measures, exclusion list provisions and safeguards can also be used to protect vulnerable groups where necessary. For example, a sufficiently accessible mechanism for adopting safeguards can help countries react to any trade flows that might threaten such groups. These groups will require close monitoring and evaluation to track the impact of liberalisation measures.
A win-win approach to the CFTA: Six critical components
There are six key components of the CFTA that are especially important to “get right”: (1) non-tariff barriers, (2) rules of origins, (3) investment and cross-border movement of persons, (4) services in general, (5) trade remedies, and (6) monitoring and evaluation.
To get non-tariff barriers (NTBs) right, a NTB mechanism should be included in the CFTA. Rather than duplicating the existing NTB mechanisms of the regional economic communities (RECs), the CFTA mechanism should build on their successes by expanding their operations across Africa to include trade between and within all RECs. In particular, the successful Tripartite NTB mechanism could be expanded to cover trade across the continent.
Getting rules of origin right will require balancing the desire of more-advanced countries for product-specific rules with the preference of less-advanced countries for more accessible rules of origin. Product-specific rules should be limited to only the most controversial or sensitive products, with simple rules applied as far as possible. If product-specific rules are to take an excessively long time to negotiate, negotiators can follow the example of the Pan-Arab FTA and lock in the benefits of the CFTA with simple rules of origin over a transitionary five-year period, during which more complex rules can be refined. Lastly, preferential rules of origin can be designed to help make it easier for Africa’s less-developed countries to satisfy rules of origin requirements – these would entail easier criteria for qualifying countries.
For investment and the cross-border movement of persons – which are often treated within the services section of a trade agreement –, fully-fledged, standalone chapters in the CFTA Agreement are recommended. This would enable the comprehensive coverage of all aspects related to the supply of services through the establishment of commercial presence. Regarding the cross-border movement of persons, negotiators should design an approach that does not take away from African entrepreneurs what they already have in their RECs, while creating new opportunities for inter-REC movement.
Getting services right requires an approach that builds on the existing achievements and challenges of the RECs in services liberalisation and regulatory cooperation. For liberalisation, member states should build on commitments already made in the RECs but be prepared to go further as required by the modalities for services liberalisation that have been agreed. For regulatory cooperation, this involves deploying the most appropriate mechanism – formal or informal – based on sector-specific variables. It may entail harmonisation in certain sectors, mutual recognition agreements in others, treaties, or more informal approaches.
Trade remedies are a crucial fail-safe for countries wary that competition could damage certain domestic industries. Getting them right in the CFTA will require regional investigating authorities, which will help extend remedies to small and less-developed African countries.
Finally, monitoring and evaluation is needed to ensure each country’s compliance with the CFTA, to track progress in the implementation of the BIAT Action Plan, and to ensure that the CFTA is contributing to Africa’s development goals. A self-assessment monitoring and evaluation “scorecard” is recommended, as is the collection of data by gender and vulnerable group.
Financing for bringing the CFTA about
Financing in Africa has to be increasingly based on domestic public and private resources. This will help to overcome the challenges related to official development assistance (ODA), including risks with perpetuating donor-driven, rather than Africa-led initiatives, and fostering donor “signalling” – whereby actions are taken superficially to satisfy donor obligations rather than drive development. Self-financing will help to improve ownership and responsibility for projects, and in turn drive implementation.
One innovative method of self-finance is the AU’s proposed 0.2 percent levy on imported goodsinto Africa. Currently, only 44 percent of the AU budget is provided by member states. The levy would help raise an estimated US$1.2 billion a year to fully fund the AU’s operational budget, finance 75 percent of its programme budget, 25 percent of its peace and security operation budget, and the peace fund. Care should, however, be taken to ensure that the levy is WTO-compliant. The CFTA can ensure that the levy complies with WTO rules regarding the MFN principle, as they permit derogations from MFN treatment in order to form regional FTAs, but there could remain an issue of sequencing if the levy were imposed before member states have implemented the CFTA. The levy could face further WTO compatibility challenges with regard to WTO tariff-binding schedules, though ad hoc measures could address the violation of the binding schedules. Against all these issues, African countries may also apply for a WTO waiver.
Nevertheless, aid for trade will remain important for bringing the CFTA about, particularly for Africa’s poorest countries with little access to private finance and low levels of domestic resources. It may also remain important for Africa’s lower-middle-income countries over the short run as they mobilise their own domestic resources. Aid for trade – and especially regional aid for trade – is the vehicle of choice for leveraging ODA towards the CFTA. Aid-for-trade disbursements to Africa have reached US$14 billion in 2015, more than twice the annual average during the 2002-2005 baseline period, and have particularly targeted economic infrastructure and productive capacity building.
The current restructuring of the AU – as part of the AU reform – provides an opportunity for the AU to be reshaped so that flagship projects like the CFTA can be better institutionalised and implemented. However, designing an institutional framework for the CFTA will be challenging if the main aspects of the AU reform have not been finalised.
Nevertheless, five principles can guide the formation of the CFTA’s institutions: use the Abuja Treaty as the backbone to the CFTA institutional form; use and empower existing structures of African integration where available; ensure that the institutions of the CFTA are accessible to the African people; support the joint implementation of the BIAT Action Plan alongside the CFTA; and develop practical institutional forms, rather than idealistic ones.
But first things first: each CFTA partner state should designate a ministerial level agency as responsible for implementing and communicating on CFTA issues. This follows the successful approach used in EAC, in which lead agencies for each country were charged with coordinating implementation and application of EAC commitments at the national level.
Over the longer term, the CFTA should work to streamline and rationalise Africa’s overlapping “spaghetti bowl” of REC FTAs. Such a process will enable Africa to economise the resources now required to undertake trade policy activities in each of the RECs. It is expected that the RECs will then contribute to continental trade policy through their roles in the CFTA institutional architecture.
In terms of dispute settlement arrangements, it is recommended that member states first use non-litigious method to resolve disputes. This would include direct diplomatic negotiations followed by mediation and conciliation through CFTA institutions. Where non-litigious methods fail to produce an outcome within six months, a CFTA Dispute Settlement Committee could be charged with resolving the dispute. Appeals may then be heard by the African Court of Human and Peoples’ Rights, which would either convene a commercial chamber or establish specialist ad hoc committees for this purpose.
Phase 2 negotiations: Competition, intellectual property rights and e-commerce
Competition and intellectual property will be part of the second phase of CFTA negotiations – expected to be launched after the conclusion of negotiations on goods and services – and there is scope for also introducing issues of e-commerce.
To prevent anti-competitive practices, a regional approach is needed for dealing with cross-border cartels, mergers, acquisitions, and abuses of dominant market positions. The CFTA can be used as a vehicle to address such cross-border competition issues and can also help countries with no competition laws to enact some in conformity to an agreed approach as envisaged in a continental competition framework.
In the area of intellectual property, any approach must be considerate of the fact that innovation in Africa is different, occurring mostly in the informal sector and in the absence of strong intellectual property institutions. An agreement regarding intellectual property must address overlapping subregional IP organisations and the proliferation of IP matters in RECs, while ensuring alignment with the continent’s overall development goals. This can be done by addressing the particular demands of African innovation with appropriate procedural and substantive principles.
E-commerce and the rise of the digital economy is causing a shift in traditional economic sectors and the emergence of new digital products and services. An African digital industrial strategy is recommended to address the opportunities and disruptive challenges entailed by the digital economy. The CFTA should provide a platform for consolidating a common stance on e-commerce rules and for integrating a market for Africa’s own digital businesses.
The CFTA provides an exceptional opportunity for Africa to harmonize its continental trade environment and boost intra-African trade. However, the CFTA must be designed such that it is “win-win” for all Africa’s diverse range of countries and especially for vulnerable groups. Seizing this opportunity will require careful approaches to a range of substantive topics within the CFTA. It will also require the effective implementation of the Boosting Intra-African Trade (BIAT) Action Plan, which provides the framework for the flanking policies that are key to the CFTA’s success. Bringing this about will in turn require innovative approaches to financing and trade governance, before phase 2 issues such as competition, intellectual property and e-commerce can be broached.
Authors: David Luke, Coordinator of the African Trade Policy Centre (ATPC) at the UN Economic Commission for Africa (UNECA). Jamie MacLeod, Trade Policy Fellow, African Trade Policy Centre (ATPC) at the UN Economic Commission for Africa.
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