The African Trade Policy Centre (ATPC) of the United Nations Economic Commission for Africa (ECA) – Written evidence (ZAF0037)
House of Lords Enquiry on the UK and Sub-Saharan Africa
14 April 2020
AfCFTA: boosting intra-African trade, GDP and welfare
The AfCFTA is expected to provide impetus to export-driven growth in Africa. Given the devastating impact of the COVID-19 crisis on African economies the AfCFTA is also now expected to contribute to the recovery effort. However, prior to the crisis, ECA modelling exercises indicate that following the implementation of the AfCFTA, all African countries will experience an increase in their GDP. ECA projections also show large increases in intra-African trade under the AfCFTA, particularly for industrial goods (see question 3).
Figure 1: Changes in Africa’s GDP, as compared to the baseline without AfCFTA in place - 2040 - US$ billion (various scenarios)
Source: ECA’s calculations based on MIRAGE CGE model
Most interestingly, industry dominates the gains in intra-African trade, and this is particularly pronounced for African Least Developed Countries (LDCs). Two-thirds of the total gains in intra-African exports were found to be concentrated in industry, whereas it was as much as three-quarters for African LDCs alone (see Figure 2). This highlights that the AfCFTA can be “win-win’ since it also offers opportunity for spurring growth and development in Africa’s LDCs.
Figure 2: Proportion of total gains in Africa’s (non-LDCs vs. LDCs) exports to Africa, by main sectors, under intermediate ambition scenario (as compared to baseline) – in 2040
Source: ECA’s calculations based on MIRAGE CGE model
Not surprisingly, following the reduction of tariffs on goods implied by the AfCFTA reform, ECA project that tariff revenues would decrease for Africa between -6.5 per cent and -9.9 percent, depending on the ambition of the scenario, as compared to a baseline without AfCFTA, in 2040 (see Figure 3). However, despite the decrease in tariff revenues, the welfare of Africa is expected to increase with the AfCFTA, largely due to the significant expansion of intra-African exports (see Figure 4).
Figure 3: Change in African countries/regions’ tariff revenues under various scenarios, as compared to a baseline without AfCFTA in place - 2040 - %
Source: ECA’s calculations based on MIRAGE CGE model
Figure 4: Change in African countries/regions’ welfare under various scenarios, as compared to a baseline without AfCFTA in place - 2040 - %
Source: ECA’s calculations based on MIRAGE CGE model
COVID-19: AfCFTA now part of a post COVID-19 recovery strategy
The above estimates were however made in 2019 before the COVID-19 crisis, which is now spreading rapidly across the African continent. The reality is that the impact of the AfCFTA will now take place from a much lower baseline for GDP, welfare and trade. ECA estimate that in the best case scenario, Africa’s average GDP growth for 2020 will fall 1.4 percentage points, from 3.2 percent to 1.8 percent – equivalent to a loss in GDP growth of $29 billion in 2020. In a worst-case scenario the projections indicate Africa’s economy contracting by up to 2.6 percent in 2020 – equivalent to a loss in GDP growth of $120 billion. In addition, ECA estimates point to COVID-19 pushing 27 million people into extreme poverty, while imposing $44-446 billion in additional health costs. To protect and build towards Africa’s shared prosperity, at least $100 billion will be needed to immediately resource a health response and an additional $100 billion for economic stimulus.
For countries fortunate enough to suppress their COVID-19 cases, the economic damage of containment lockdowns and health costs, as well as the ripple effects from the rest of the world are unavoidable. The price of oil, which accounts for 40 percent of Africa’s exports, has halved in value, and major African exports like textiles and fresh cut flowers have crashed. Tourism – which accounts for up to 38 percent of some African countries’ GDP – has effectively halted, as has the airline industry that supports it.
With the expectation that the worst of the COVID-19 crisis may run until the end of 2020, African Member States have made a decision to push back the start of trade date under the AfCFTA from 1 July 2020 to 1 January 2021. Start of trade is therefore likely to coincide with the start of the COVID-19 recovery for Africa.
Against this backdrop, the AfCFTA must now be seen as a part of the post-COVID-19 medium-term recovery effort. In order to weather the storm, African economies must maintain AfCFTA momentum and ambition. This will be crucial to ensuring the development of competitive and resilient regional value chains (including in the health sector), that will position the African economy more strongly in the face of future global shocks. But given the projected fall in GDP, complementary large-scale stimulus and cooperative partnership measures will also be crucial to kick-start Africa’s COVID-19 recovery, and provide a springboard for the AfCFTA to work as a vehicle for supporting economic growth.
Win-win AfCFTA: sharing the gains
Although the AfCFTA provides an important tool for increasing the size of Africa’s economic pie, how the slices of this pie are divided (both between and within African countries) will be key to determining whether the AfCFTA agreement helps to accelerate Africa’s poverty reduction in the Sustainable Development Goal (SDG) era.
The AfCFTA Agreement encompasses five key provisions of importance to ensuring a win-win AfCFTA:
ECA’s ARIA VIII Report on “Bringing the AfCFTA About” demonstrated that with the correct institutional structure for implementation, the AfCFTA embodies a ‘win-win’ approach such that all countries across Africa and vulnerable communities within these countries receive substantive benefits from the agreement. The Agreement provides a variety of opportunities that cater to the diversity of African countries, including the resource rich, agricultural-based, or more industrialized.
The Agreement alone should, however, not be seen as a panacea to Africa’s development challenges. AfCFTA implementation must take place in an inclusive manner. Some Member States may need support to implement the provisions of the agreement and tap into the opportunities provided by the AfCFTA. In particular, adjustment funds may be required to ensure that all African countries (including LDCs) are able to establish a customized pathway to benefit from Agreement, and to offset any short-term shocks from implementation of the AfCFTA.
To maximise the gains from the AfCFTA and ensure that these gains are shared in an equitable manner, implementation of the AfCFTA must also be supported by other flanking measures. The Boosting Intra-African Trade (BIAT) Action Plan – the ‘sister’ initiative to the AfCFTA - provides a framework for these flanking policies. It targets the well-known trade barriers in Africa across seven clusters: trade policy, trade facilitation, productive capacity, trade-related infrastructure, trade finance, trade information and factor market integration.
Finally, vulnerable or less well-informed groups - such as women, youth, informal traders and MSMEs - will need to be briefed on the AfCFTA through targeted advocacy workshops and activities. This will help to create a level playing field and ensure that these groups understand the content and requirements of the AfCFTA and how to access new market opportunities. To this end, ECA is currently developing a training on the AfCFTA for women’s organizations, which identifies the opportunities and challenges the AfCFTA presents for female traders and guides on how women can tap into AfCFTA benefits.
The AfCFTA and RECs
The Abuja Treaty envisioned the establishment of an African Economic Community through six stages over 34 years, entailing the creation of a common market with the RECs as building blocks. The Treaty assumed that RECs would all conduct economic integration programs to become customs unions by 2017. That did not happen, and the AfCFTA was originally conceived to address these shortcomings by consolidating pre-existing FTAs into a single pan-African FTA.
Only 12 African countries belong to a single REC (33 belong to 2 RECs, 8 to 3 RECs and 1 to 4 RECs). (Four RECs operate free trade areas. Some have islets of deeper integration, including customs and monetary unions. Others have free trade arrangements entirely alongside and above the REC groupings.
The overlap and duplication of trading arrangements in Africa complicates customs procedures for customs administrators, traders and producers, allows forum shopping, frustrates the creation or functioning of customs unions and complicates the advancement of deeper continental economic integration. For these reasons and others, an explicit objective of the AfCFTA is to “resolve the challenges of multiple and overlapping memberships and expedite the regional and continental integration processes.” Achieving this requires amalgamating and consolidating trading arrangements in Africa.
Article 19 of the AfCFTA agreement guides the relationship between the AfCFTA and Africa’s pre-existing FTAs by providing for the resolution of incompatibilities or inconsistencies between the AfCFTA and other intra-African trade instruments. In such cases, the AfCFTA is to prevail, but with one crucial caveat: RECs that have achieved “among themselves higher levels of regional integration” are to persist as islets of such higher integration. This ensures the preservation of the acquis, in line with the third principle of the AfCFTA negotiations.
The majority of intra-African trade currently takes place within existing regional economic communities. For example, on average 55 percent of REC exports to Africa are destined to African countries within the same REC. For imports, on average about 50 percent of REC imports from African countries originate from within the same REC. The AfCFTA offers an opportunity to develop Africa-wide regional value chains (RVCs) that are not confined to existing regional groupings.
The role of RECs
Although the AfCFTA is to amalgamate and consolidate trade arrangements across the continents, RECs will still contribute to the institutional structure of the AfCFTA. RECs are expected to play a key role in coordinating implementation of the AfCFTA and complementary measures at the regional level, drawing upon their close relationships with Member States. They can also offer important advisory capacity, through their respective seats on the AfCFTA Committee of Senior Trade Officials.
In the long run, as continental integration deepens, the trade-related functions of RECs are expected to be consolidated at the continental level - in line with the eighteenth ordinary session of the Assembly of the African Union decision for “consolidation of the Tripartite and other regional FTAs into a Continental Free Trade Area”.
The implementation challenge: lessons from RECs
Implementation is a well-known challenge for African countries, as has been demonstrated in the relatively slow implementation of many REC FTAs. The AfCFTA will not take off unless the continent’s implementation challenges are addressed. These challenges are rooted at the
national and regional levels and reflect insufficient inadequate institutional and human capacity, limited financing and complex governance systems.
At this historic juncture, the real test will now be how quickly and effectively African countries will be able to implement the agreement. With this in mind, ECA and AUC are jointly assisting African Member States to prepare AfCFTA National Strategies. The need for these strategies was expressed during the African Ministers of Finance, Planning and Economic Development at the 51st Session of the Economic Commission for Africa held in May 2018 in Addis Ababa and was reiterated at the General Assembly of the AU in Nouakchott in July 2018. These strategies identify new opportunities for diversification, industrialization and value chain development, and complementary actions needed to overcome the existing constraints to intra-African trade.
Industrial development: the core of Africa’s development agenda
Africa’s manufacturing sector has grown significantly in absolute terms over the last couple of decades. Between 1995 and 2016, for example, the African manufacturing value added (MVA) in absolute terms (constant 2010 USD) more than doubled from nearly US$112 billion to US$240 billion (Figure 5). Yet, the sector still plays a limited role in the performance of Africa’s economies. The contribution of MVA to Africa’s Gross Domestic Product (GDP) remained between 9 and 12 percent over the period 1995─2016.
Figure 5: Manufacturing Valued Added and its contribution to GDP in Africa, 1995─2016
Source: ECA calculations based on data from UNIDO database
Industrial development is central to Africa’s development agenda due to its ability to shift the continent’s over-reliance on the low value added commodities sector to higher productivity and value added activities. This shift can contribute to creating productive and decent jobs for a booming African population.
To date, the restructuring of African economies towards manufacturing and industrial production, through improved integration into value chains, has been impeded by a number of tariff and non-tariff barriers. These hurdles are typically exacerbated by the fragmentation of African economies (see question 2). It is in recognition of Africa’s industrial potential, and the need for manufacturers to access larger regional and continental markets, that the establishment of the AfCFTA has become a top priority on the continent’s development agenda.
The AfCFTA: a game change for industrialization
The AfCFTA offers a game changer for diversification, upgrading manufacturing and spurring industrialization. Intra-African trade in goods records higher levels of industrial and high value goods than trade with other regions which is dominated by lower value commodities. 70 percent of exports outside the continent are extractives, while less than 40 percent within are extractives (2014-16 average).
The AfCFTA modalities commit AU member States to remove at least 97 percent of tariffs lines on goods imported from other States parties over a period of between 5 and 15 years. This ambitious trade liberalization is expected to support the processing of raw materials and development of African regional value chains (RVCs), since it will boost incentives to source inputs and intermediates from within the continent.
ECA recently carried out a modelling exercise to assess the expected impact of the AfCFTA on key variables such as trade, GDP and welfare. The projections indicate that the value of intra-African exports will increase between about 15 percent (or US$ 50 billion) and nearly 25 percent (or US$ 69.1 billion) in 2040, relative to the baseline without the AfCFTA in place. Intra-African exports were found to increase the most for industrial products, with gains ranging between around 25 per cent (or US$ 36.1 billion) and almost 30 per cent (or US$ 43.3 billion) (see Figure 6). All African countries, including those categorized as least developed are expected to benefit from increased industrial exports under the AfCFTA. This highlights the potential role the AfCFTA can play in driving industrialisation in African countries. In relative terms, and at a more disaggregated level of sectors, the largest increases in intra-African exports (i.e. all over 25 per cent in the most ambitious scenario or scenario 7) for industrial sectors were in wearing apparel, textiles, vehicles and transport equipment, wood and paper, leather, electronics, and other manufactures (see Figure 7).
Figure 6: Change in intra-African exports by main sectors, as compared to the baseline without AfCFTA in place - 2040 - US$ billion (various scenarios)
Figure 7: Top 10 gains in intra-African exports by sectors, as compared to the baseline without AfCFTA in place - 2040 - US$ billion (various scenarios)
Source: ECA’s calculations based on MIRAGE CGE model
Beyond tariff liberalization, the AfCFTA is also targeted at addressing key challenges to improving Africa’s trade and investment environment, including non-tariff barriers, standards harmonization, customs cooperation and trade facilitation. These complementary measures will help to boost industry and enterprise level competitiveness, reduce business costs and expand market access. The intra-African trade and industrialization gains are therefore expected to be even higher than the projections presented above, which only reflect tariff reductions.
In addition, the scope of the AfCFTA agreement is beyond a traditional free trade agreement, covering not only trade in goods, but also trade in services, investment, intellectual property rights, competition policy and e-commerce. This design reflects an explicit decision of African policymakers to enable trade and investment to support industrialization and development.
However, at the same time, it is important to note, that there now exists a common understanding the AfCFTA cannot be truly transformational unless it is implemented alongside complementary measures to address other supply-side challenges to intra-African trade and industrialization. With this in mind, ECA and the AUC are supporting AU Member States to develop inclusive AfCFTA National Implementation strategies (see question 2). These strategies identify new opportunities for diversification, industrialization and value chain development, and complementary actions needed to overcome the existing constraints to expanding manufacturing production and trade.
The AfCFTA: implications for Africa’s trading partners
The establishment of the landmark AfCFTA will have significant implications for the UK’s trade and investment in Africa.
The AfCFTA is not just a traditional free trade agreement. The scope is wide, including not just trade in goods, but also trade in services, investment, intellectual property rights and competition policy. The agreement also targets overcoming key challenges to improving Africa’s trade and investment environment, including non-tariff barriers, standards harmonization, customs cooperation and trade facilitation. These complementary measures will reduce the costs of doing cross-border business in Africa and provide a framework for eliminating some of the market access barriers that are currently challenging British firms. The comprehensive design of the AfCFTA highlights the seriousness of the initiative and the underlying motivation to propel Africa’s value addition and industrialisation (see question 3). Not only will the AfCFTA make Africa a less costly and more friendly place to do business, it will also provide a more effective and unified platform for partners to engage Africa.
Of particular note, the AfCFTA investment protocol will provide common rules for state parties to introduce harmonized incentives for attracting investments to accelerate development. This regulatory convergence on investment issues is expected to facilitate access by both African and foreign investors in a broader African market. This offers an opportunity for the UK to diversify its trade and investment in Africa, since it will make it easier to engage with African countries on designing trans-boundary investment projects.
However, the AfCFTA is not an unfettered opening of Africa’s markets. Its principal preferences and benefits accrue to those investors who create production and value-added within Africa, and in doing so fuel African job creation, growth and prosperity. British investors can take part in contributing to Africa’s development through substantive and transformative investments.
Negotiating with Africa as one
As Africa embarks on its AfCFTA journey, and looks toward the establishment of an African Single Market, the continent’s trading partners, including the UK, should aim to negotiate with Africa as one single market. Although Africa negotiated the Economic Partnership Agreements in five regional groupings fifteen years ago, the continent’s trade landscape has now significantly changed. Current EPA regional blocs do not match Regional Economic Community groupings and the EPA process has not evolved with Africa’s industrialization and development objectives. The fragmented approach to the EPA negotiations has created obstacles for regional value chain development in Africa, and should not continue. The application of several cumulation regimes in particular, as well as the difficulties linked to the administrative cooperation requirements, has constrained opportunities for value chain development between countries in different EPA blocs.
A continental approach that is aligned with Africa’s regional integration, industrialization and development priorities would also be in the UK’s interest. It would help to build confidence between the United Kingdom and Africa, avoid overstretching negotiating capacities on both sides, and facilitate engagement for deeper British-African trade integration in the future.
An African-UK FTA could also serve as an important model for updating and improving on the current EPAs, the continent’s trade partnership with the United States post the African Growth and Opportunity Act in 2025, and also it’s expanding trade relationship with emerging market economies.
Ensuring a relevant trade relationship: climate change and COVID-19
Finally, the AfCFTA is to be implemented in a world where climate change can no longer be side-lined. The UN Sustainable Development Goals include a number of targets related to food security and climate change. A large share of Africa’s exports consists of fossil fuels such as coal and oil. This is a reality that Africa will need to discuss with its trade and investment partners, including the UK. The AfCFTA and Brexit offer important platforms to diversify from British investments in Africa’s oil production and export to investments in renewables such as solar and wind. The next United Nations Climate Change Conference (COP26) is scheduled to take place in Glasgow, and offers an opportunity to raise the profile of climate change in defining Africa’s new relationship with the UK.
At the same time, the current COVID-19 crisis is expected to result in a huge hit to African economies. The World Bank project that the economy of Africa (excluding North Africa) will be between 2.1 percent and 5.1 percent smaller by the end of the year. The economies worst hit by the fallout from the coronavirus pandemic will be those which are dependent on the export of oil and minerals, such as Nigeria, Angola and South Africa.
There exists concern that protectionism may rise and global value chains may disintegrate during the global COVID-19 recovery. This will have significant economic long-term implications for Africa. Trade and investment linkages, and donor support, will be crucial to ensuring a resilient, green and sustainable recovery for the continent. In the short term, African countries are heavily dependent on the importation of essential COVID-19 medical supplies. It is crucial that Africa’s trading partners understand the threat that export restrictions on Covid-19 medical supplies will pose for the testing, monitoring, and protection against Covid-19 in Africa. In the longer-term, African countries must use the AfCFTA to create regional value chains for Africa to better serve its own health market, estimated at $259 billion annually. Experienced UK health providers could serve as important partners to facilitate the development of Africa’s health market and medical supplies.
Received 14 April 2020
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