The African Continental Free Trade Area Agreement – what is expected of LDCs in terms of trade liberalisation? By Trudi Hartzenberg, Executive Director, Trade Law Centre (tralac) and member of the Committee for Development Policy (CDP)

By Trudi Hartzenberg, Executive Director, Trade Law Centre (tralac) and member of the Committee for Development Policy (CDP)

The fifty-five member states of the Africa Union (AU) are establishing the African Continental Free Trade Area (AfCFTA) to create a single continent-wide market for goods and services and to promote the movement of capital and natural persons. This ambitious project enjoys considerable political support, but individual States still face difficult choices. Africa’s economies vary considerably in size, levels of economic development and diversification. Without exception they face challenges to create jobs, develop their industrial sectors and diversify their production capacity. This is particularly true for the 32 least developed countries (LDCs) negotiating the AfCFTA.

For many African countries, most of their trade is still with global trading partners. This will not change in the near future and neither will their commodity dependence.   This is especially true for the LDCs. While a new trade agreement does not guarantee trade, it does change the incentives to make trade with other partners to that agreement more accessible and attractive. The AfCFTA has the potential to put in place mechanisms to address many of the non-tariff challenges frustrating intra-African trade. It could do so in a manner which will provide more certainty and predictability and improve the trade facilitation environment. The potential dynamic benefits of the AfCFTA are particularly important. Larger integrated markets may well be more attractive to investors and along with new investment could come new technologies and learning that could boost productive capacity.

It is important to note that the existing regional economic communities (RECs) will not disappear. Intra-Africa trade is highly concentrated within the RECs. More than half of total intra-Africa trade rakes place within the Southern African Customs Union (SACU), and more than 65% takes place within the Southern African Development Community (SADC).[1] Intra-African trade will continue on multiple tracks. As the AfCFTA advances and becomes more consolidated, there should be more policy convergence, and a simplification of rules across the different trading regimes.

At the 12th Extra-Ordinary AU Summit which took place in Niamey, Niger on 7 July, the operational phase of the AfCFTA was launched. By then 27 member states had ratified the agreement, well beyond the 22 ratifications required for the agreement to enter into force.[2]   The statements at this occasion are a reminder that there is still work to be done before goods or services can be traded under the AfCFTA regime. The agreement is being negotiated in two phases. Phase 1 covers trade in goods and trade services disciplines, as well as dispute settlement. Tariff concessions are still to be negotiated among the member states, they have to finalise negotiations on rules of origin, and for trade in services, the specific commitments are also still to be negotiated. Phase 2 will focus on cooperation on investment, competition and intellectual property rights.[3]

For LDCs the matter of tariff concessions is a sensitive one. Despite low levels of intra-Africa trade, tariff revenue is still an important source of government revenue, and the tariff remains an important measure to reduce import competition and so protect domestic industry. The table below summarises the modalities for the negotiation of tariff concessions. Variable geometry is one of the cornerstone principles enshrined in the agreement. It means that all member states aim to achieve the same level of tariff liberalisation – member states have agreed that 90% of tariff lines are to be liberalised.   A distinction is drawn between LDCs and non-LDCs for the tariff negotiations. LDCs have 10 years to achieve 90% liberalisation, while non-LDCs have 5 years. The remaining 10% of tariff lines is divided into two categories.   7% can be designated sensitive products and 3% of tariff lines can be excluded from liberalisation entirely. LDCs have 13 years to eliminate tariffs on sensitive products and may maintain their current tariffs for the first 5 years, backloading liberalisation during the remaining 8 years. Non-LDCs have 10 years to eliminate tariffs on sensitive products and may also retain the status quo, starting liberalisation in year 6.   Both LDCs and non-LDCs may exclude 3% of tariff lines, but the excluded products may not account for more than 10% of their total trade.   There is a further carve-out for a specific group of countries, the so-called G6. They are Ethiopia, Madagascar, Malawi, Sudan, Zambia, Zimbabwe. These countries have argued that they face specific development challenges and have managed to secure a 15-year phase down period. How they will divide the remaining 10% between sensitive and excluded products is still to be determined. Angola and Sao Tome and Principe, which are due to graduate from their LDC status in 2021 and 2024 respectively are not included in the G6 group.

LDCs Non-LDCs G6 countries
 

Full liberalisation

90% of tariff lines 90% of tariff lines 90% of tariff lines
10-year phase down 5-year phase down 15-year phase down
Sensitive products 7% of tariff lines 7% of tariff lines  

Not yet determined

13-year phase down (current tariffs can be maintained during first 5 years – phase down starting in year 6) 10-year phase down (current tariffs can be maintained during first 5 years – phase down starting in year 6)
Excluded products 3% of tariff lines 3% of tariff lines Not yet determined

Note:

  1. LDCs: Angola, Benin, Burkina Faso, Burundi, Central African Republic, Chad, Comoros, Democratic Republic of Congo, Djibouti, Eritrea, Ethiopia, Gambia, Guinea, Guinea-Bissau, Lesotho, Madagascar, Malawi, Mali, Mauritania, Mozambique, Niger, Rwanda, Sao Tome and Principe, Senegal, Sierra Leone, Somalia, South Sudan, Sudan, Togo, Uganda, United Republic of Tanzania, Zambia
  2. G6 countries: Ethiopia, Madagascar, Malawi, Sudan, Zambia, Zimbabwe

 

At the Niamey Summit, several AfCFTA-related initiatives were announced that will be very important, especially for LDCs facing adjustment challenges, as they start to implement their liberalisation commitments. Africa’s largest trade bank – Afreximbank – unveiled a $1bn financing facility to support countries to adjust in an orderly manner to sudden tariff revenue losses as a result of the implementation of the AfCFTA Agreement. An Africa-wide digital payment system is to be developed in collaboration with the AU. It will be a platform to domesticate intra-regional payments. It could save the continent more than $5 billion in payment transaction costs per annum. A simplified trade regime for the AfCFTA is also to be developed. This is a very important facility, particularly in view of the very substantial communities of informal traders, many of whom are women.

The AfCFTA is not only a free trade area. It is also a flagship project of the AU. As such, the many other AU projects such as those focusing on industrial and infrastructure development will be especially important for LDCs as they seek to deal with the challenges of implementing their AfCFTA commitments.

[1] All SACU member states also belong to SADC. South Africa as the most industrialised economy in this sub-region is a key driver of this trade. https://www.imf.org/external/pubs/ft/fandd/2018/09/sub-saharan-africa-regional-integration-arizala.htm

[2] See the Trade Law Centre’s AfCFTA ratification monitor. The AfCFTA entered into force on 30 May 2019, 30 days after the 22nd instrument of ratification had been deposited with the designated depositary. https://www.tralac.org/resources/infographics/13795-status-of-afcfta-ratification.html

[3] https://www.tralac.org/blog/article/14160-does-the-african-continental-free-trade-area-mean-business.html#_ftn3