Launch of the Continental Free Trade Area: New prospects for African trade?

23 June 2015

What are the prospects for the negotiations towards the establishment of Continental FTA in Africa?  

The African Union (AU) summit formally launched negotiations for a Continental Free Trade Area (CFTA) at its meeting in Johannesburg, South Africa on 15 June.  The CFTA is a priority initiative under the AU’s Agenda 2063 which has laid out a vision for the trajectory of African development during the next five decades.  The CFTA is one of the pillars for the implementation of the Agenda 2063 aspiration for a prosperous Africa based on inclusive growth and sustainable development.  This aspiration is predicated on the implementation of policies aimed at achieving systematic convergence with more developed countries and regions and growing integration into the global economy as a respected partner. 

It is expected that the CFTA will encompass the 54 AU member states with a population of over a billion people and a combined GDP of over US$3 trillion in 2014. According to research by the UN Economic Commission for Africa (UNECA), successful conclusion and implementation of a CFTA agreement complemented with efforts to improve trade-related infrastructure and customs procedures and reduce transit and other trade costs could lead to a 52 per cent ($35 billion) increase in intra-African trade by 2022, above a 2017 baseline scenario. Negotiations are expected to be concluded by 2017.The AU summit in Johannesburg clarified the scope, institutional arrangements, guiding principles and other practical arrangements to support the negotiations.  The summit reaffirmed 2017 as the indicative date for the finalization of the negotiations.

The ambitious time-frame for the CFTA negotiations is related to the fact that the implementation of the Abuja Treaty which provides the legal basis for the negotiations is running behind schedule. The Abuja Treaty, which entered into force in 1994, provides a roadmap to advance regional integration in Africa, with key benchmarks such as the establishment of a Customs Union by 2022 and an African Economic Community by 2028.

The launch of the CFTA negotiations with 2017 as the indicative date for the completion of the negotiations is therefore also a political initiative to keep implementation of the Abuja Treaty on track. But it is also a step-change in the approach to integration in Africa.  The RECs remain important building blocks with accumulated implementation capacities.  But the focus is shifting towards continent-wide arrangements. The ambition to reach the core of a CFTA agreement within two years can be understood against this background.

The CFTA negotiation was also launched in a context of growing uncertainty over the future direction of the multilateral trading system and a changing global trade landscape, with the rise of mega-regional trade agreements (MRTAs) including the Trans-Atlantic Trade and Investment Partnership (TTIP), the Trans-Pacific Partnership (TPP), and the Regional Comprehensive Economic Partnership (RCEP).

Africa is not a part of any of these emerging configurations and is expected to be negatively impacted by these agreements. UNECA research estimates that due to preference erosion and greater competition faced by African countries in MRTA markets, African total exports could be reduced by USD 2.7 billion (or 0.3 percent), by 2020, compared to a baseline without MRTAs in place. While this trade diversion effect can be perceived as being relatively insignificant, UNECA research highlights that Africa’s exports would decrease in critical categories, with the largest reduction in industrial goods, particularly with regards to trade with RCEP countries. However, the effective establishment of the Continental Free Trade Area (especially if accompanied by measures to reduce trade costs) can offset the potential negative impacts of the MRTAs.

More broadly, preferential trading arrangements between Africa and key partners are changing as well. Economic Partnership Agreements (EPAs) with the European Union have been mostly concluded. While African Least Developed Countries (LDCs) continue to enjoy preferential market access in Europe, the EPAs have introduced reciprocity into Africa’s trade arrangements with Europe. Meanwhile, the United States is renewing its African Growth and Opportunity Act (AGOA) for 10 years up to 2025. But it has signalled that it expects to follow the path Europe has taken and eventually move towards a reciprocal trade relationship.

Effective African trade strategies for engaging with China and other large or emerging countries are yet to be fully articulated.

These developments make clear that without locking in preferential trade arrangements among themselves, African countries participating in different RECs could offer better terms to external partners than they offer each other.  For example, Senegal in ECOWAS trades on MFN terms with Kenya in the EAC but each country is committed to offering Europe preferential access when their respective EPA arrangements are fully implemented.  Aside from the political momentum to keep the mileposts of the Abuja Treaty on track, the implications of the MRTAs and the changing trade landscape provide the context that have made the conclusion of a CFTA all the more urgent.

Practical arrangements

The AU summit in Johannesburg determined that the scope of the negotiation should cover, trade in goods, trade in services, investment, intellectual property rights and competition policy. The summit further adopted principles to guide the CFTA negotiations such as the principle of “RECs FTAs as building blocks for the CFTA”, “reservation of acquis”, “variable geometry”, “flexibility” and “special and differential treatment”, “transparency” and “disclosure of information” and others. These negotiating principles are critical for the success of the negotiations.

In spite of the opportunities offered by the CFTA, it is clear that it will be a complex exercise. The negotiation will be among 54 countries and eight RECs at various levels of development and with different capacities. The closest equivalent is the WTO, but the CFTA negotiations will be carried out without the technical resources of the WTO and its secretariat. Addressing these capacity constraints is therefore critical to the success of the negotiations.

The scope and sequence of the negotiations includes goods and services to be negotiated simultaneously. While this might appear to be overly ambitious, taking negotiating capacity into account, this decision by the summit is calculated to ensure trade-offs between countries with stronger comparative advantage in either of these sectors. The critical role of the service sector in generating employment, incomes and in value chains is now well recognised. And indeed, for some relatively small African countries, their competitiveness might lie in services rather than in goods.

Another practical challenge relates to ensuring that the gains from the CFTA are distributed as broadly as possible among the participating countries. There have been concerns expressed by some of the smaller countries that larger countries will dominate the CFTA both in terms of the negotiations as well as the outcomes. These anxieties underscore the importance attached to principles such as special and differential treatment as well as variable geometry to ensure the necessary flexibilities to address different development needs. At the same time, however, with the majority of the countries in the CFTA being LDCs, it is important to make sure that the weight of the obligations is not borne by the few large and relatively more developed countries. It will be crucial to take on board the experience of how the RECs have dealt with these issues in practice and the lessons that can be adopted.

Prospects

Trade negotiations take time. The TFTA negotiations officially launched in June 2011 was only concluded in 2015 with an additional 12 months granted to finalise various technical issues. One option for the CFTA negotiation is to pursue a two-step approach that will entail: 1) Aiming for agreements with commercial value in all feasible areas as an “early harvest”;  2) Continue negotiations beyond 2017 in all outstanding areas if necessary with a flexible timeframe for completion.

Trade in goods is one possible area for an early harvest with the possibility of an early agreement on issues such as standards, customs and trade facilitation issues as well as others while the tariff issues are being resolved. For Trade in services, special emphasis could be placed on the services that facilitate investment (i.e. business, financial services, ICT, etc.) or reduce trade costs (transport, logistics, electronic commerce, etc.) in order to secure quick wins for African economies.

Early harvest agreement can also be reached on issues such as a common investment regime, competition policy and intellectual property rights by building upon existing arrangements in the RECs and other coordination mechanisms.

In conclusion, the launch of the CFTA negotiations marks the beginning of a process that could bring Africa closer to its development goals and the achievement of the Agenda 2063 aspirations. A successful negotiation and implementation of the CFTA agreement as a modern 21st century trade pact, aside from the tangible benefits it will bring, will signal the continent’s readiness to break from the negative narratives of the past towards a future based on shared prosperity.  Failure is not an option.

Authors: Babajide Sodipo, Regional Trade Adviser, African Union Commission. David Luke Coordinator of the Africa, Trade Policy Centre, Regional Integration and Trade Division, UNECA.

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