Assessing the Prospects for the African Continental Free Trade Area - Guest Post By Dan Gay

This is a guest post by Dan Gay, who writes the Emergent Economics blog.  Dan Gay is an advisor on international trade, economic policy and development, particularly in the least developed countries. He has worked for the United Nations, The World Bank, governments and development agencies in Africa, Asia, the South Pacific and the Caribbean.

He comments regularly in the national and international media.

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The launch of the African Continental Free Trade Area (ACFTA), in 2019, heralded the start of the biggest trade area since the World Trade Organisation in 1997. Bringing together 54 of the 55 African Union states, the new bloc encompasses 1.2 billion people, around 16% of the global population and more than a quarter of the world’s countries. 

In an increasingly fragmented and multi-polar world, in which south-south trade appears to hold new potential, after many decades of northern dominance, is ACFTA an example of what the Egyptian dependency theorist Samir Amin termed ‘de-linking’ from the core countries? Is Africa finally striking out alone after many years of dependence on the developed world? And will greater intra-regional trade translate into economic advancement and better living standards? 

Most international commentary highlights the potential. The UN Economic Commission for Africa (UNECA) estimates that eliminating import duties could increase intra-African trade 52.3%, by 2022, and that getting rid of non-tariff barriers will double this again. The creation of a single continental market for goods and services, with free movement of business, people and investment, is intended to lay the groundwork for a customs union, which, in turn, would propel further economic gains. Until Covid-19, several sub-Saharan African economies were already booming, dragging neighbours along with them. Ethiopia’s economy, for example, grew 9.9% a year in the decade to 2018. 

Better harmonization and coordination of trade, it is predicted, will lead to opportunities for production at scale and increased intra-continental market access. The World Bank suggests that ACFTA will move 30 million people out of what it calls ‘extreme’ poverty, which is defined as below $1.90 a day in purchasing power terms, (what that sum would have bought in America in 2011: as some have pointed out, an extremely low bar). 68 million people are forecast to move above the $5.50 a day threshold. 

Both progressives and conservatives understand that trade – whether multilateral or regional -- can bring increased wealth and solidarity. There is nothing progressive about fragmentation, bureaucracy or even tax in the form of import tariffs. The alternative to globalisation is not autarky, the pursuit of which is counterproductive and anyway near-impossible. Although Amin probably wouldn’t have liked ACFTA, he advocated a new international and saw great hope in the possibilities arising from the World Social Forum. 

With global multilateralism under stress, the most recent phase of global economic expansion has had an increasingly regional character. More than half of world trade now takes place within geographic blocs. The importance of regionalism and trade is recognised by policymakers in the world’s most dynamic areas. East Asian integration has continued to fuel the region’s rise after the ‘miracle years’. The region now trades more with itself and less with Europe and the US. European consolidation, despite its flaws, has expanded trade and incomes, even though internal rifts are widening. Even Trump couldn’t change NAFTA much, despite pretending to radically renegotiate it. Africa, in contrast, is late to the regional game. 

The most obvious retort to the idea that ACFTA involves de-linking is that it is too business-cosy and does nothing for ordinary people. Trade liberalisation without fiscal redistribution tends to worsen inequality. But trade blocs don’t inevitably fuel unfairness, and international fragmentation can be more inegalitarian. Progressives may be disappointed in the lack of social provision in the ACFTA rulebook, but so far nothing suggests that governments will be prevented from spending more or redistributing. The yawning inequality that exists in Africa today is largely the result of government policies and global relationships, not regional rules, existing or incipient. 

So far, so promising. But realism is needed. Covid-19 has devastated Africa, causing a human health crisis, slashing trade and economic growth, and ultimately preventing governments from officially taking part in ACFTA. According to Wamkele Mene, Secretary General of the ACFTA Secretariat, “given the current public health crisis and the need for some technical work to be concluded, we cannot meaningfully trade [under ACFTA] on 1 July [2020]”. 

Over the past decade 80-90% of African exports still went to the rest of the world, where demand has collapsed during the pandemic. As so often, when the world sneezes, Africa catches a cold. 

This underscores one of the main counterpoints to the ACFTA-optimists. Unlike the world’s richer regions, Africa currently doesn’t trade much with itself. According to the UN Conference on Trade and Development (UNCTAD), intra-African trade, the average of intra-African exports and imports, was only around 2% from 2015 to 2017, compared with 47%, 61%, 67% and 7% respectively in America, Asia, Europe and Oceania. 

The African continent is likely to remain externally-reliant for many years, even if ACFTA proceeds smoothly. ACFTA gross domestic product (GDP) is about 4% of world GDP. The entire $3.4 trillion ACFTA economy is smaller than Germany’s, which is $3.9 trillion. The economies of the United States, the European Union and Japan are each much bigger than sub-Saharan Africa’s -- the US economy over five times the size. The sheer economic heft of Europe and the US compel African reliance upon them. 

Former World Bank Chief economist Justin Lin argues that the first and most simple step toward trade-driven economic transformation in many sub-Saharan African states should be first to access the concentrated, high-spending destinations of Europe and the United States, and later turn attention to the continent itself. 

Not only is Africa reliant on the rest of the world, but supplanting external demand will prove extremely difficult. Internal fragmentation and smallness are among the biggest hurdles. South Africa and Nigeria alone represent a third of ACFTA’s economic output. Many of the smaller and least developed countries are too tiny ever to constitute major export destinations for the bigger African trading nations. This internal disparity is only likely to widen, with the bigger and more prosperous nations gaining most from trade, while the others lag behind -- particularly the increasing number of countries in conflict. Africa isn’t a country. 

Add to this difficulties of geography, timezones and language, and intra-regional trade becomes ever more problematic. The ACTFA Secretariat itself uses four languages, English, French, Arabic and Portuguese, slowing technical discussions. Many countries in Africa are simply not connected, by road, rail or air. Travel from one side of the continent to the other, or even within West Africa, can be easier via Europe. 

The last time I went from the United States to Gambia I had to change flights in Accra, where the plane needed several hours of repairs before it took off, hopping to Abidjan and onward to Banjul. I returned via Casablanca. Travelling from east Africa to west, and vice versa, can be particularly complicated. 

Gains from trade require differentiation – which is limited so far. Reliance on commodity and resource production, and the relatively low levels of value-addition and product sophistication mean that several countries still produce similar products, about which they are somewhat protectionist. For the moment, Nigeria probably won’t sell much milk to Uganda. 

Non-tariff barriers are among the worst in the world. Kenyan roadblocks, for instance, are notorious, and slow the transport of anything delivered by truck inside the country. Many African borders are similarly clogged. When I crossed the Namanga border en route to Tanzania I spent half a day queuing and filling out paperwork. 

The problem lingers. Despite an agreement in May on mutual recognition of Covid-19 certificates, Tanzanian drivers are still stopped, prompting the country to retaliate with similar measures. Even in the relatively prosperous regions such as East Africa, mutual suspicion remains, due to historical conflict and political difference. 

According to the representative of a major manufacturer I spoke to this year, one of the main reasons why Ethiopia won’t soon rival countries like Bangladesh, Cambodia or Myanmar as a low-cost producer is that the port of Djibouti, through which many Ethiopian exports travel, is clogged with traffic, making it near-impossible to conduct ‘just-in-time’ production. 

UNCTAD has argued that rules of origin – the criteria which determine a product’s nationality – could prove decisive. UNCTAD suggests that rules need to be simple, flexible, transparent and predictable. 

Although ACFTA aims precisely at reducing such non-tariff barriers, countless initiatives have aimed to do so, with limited success. Corruption, precedent and lack of trust often override state or regional initiatives. 

The existence of eight overlapping African regional trading blocs does little to help continental consolidation. Each has different tariff schedules, standards and other rules. Harmonisation will prove extremely difficult, as the Southern African Development Community, for example, starts from a different position than the Economic Community of West African States. 

Europe and the United States haven’t helped, obliging some regions to sign one-on-one deals and far-reaching Economic Partnership Agreements (EPAs) in order to maintain market access. The US is pursuing bilaterals to replace the Trans-continental African Growth and Opportunity Act, currently in place until 2025. The regions which have signed EPAs or bilaterals will start at a higher level of external market access, and Africa-EU and Africa-US trade is likely to be diverted through these zones, further driving a wedge between them and the rest of the continent. 

This highlights the underlying issue of sub-Saharan Africa’s peripheralisation in the world economy. The main reason why intra-African trade, value-addition and differentiation tend to be so low is that many African countries remain a resource base for the core countries. As Amin said: “We must remember that the target of [colonialists] everywhere was the same: to obtain cheap exports.” This explains why Europe and the US are so ready to provide trade preferences for Africa, and why particular channels remain more important than others. 

Most African exports head outside the continent because of this colonial legacy. The world economy needs somewhere to extract resources and to make things cheaply. For example the demand for cobalt, manganese and nickel for smartphones and electric car batteries will continue to make source countries beholden to the core -- similarly oil and gas for many years, even as carbon-based energy dies out. The increasing Chinese presence in the continent is driven by the need for resources and, in some cases, farmland. 

UNCTAD reports that 89% of sub-Saharan African countries are commodity-dependent, much worse than any other region, with the situation having worsened over the past two decades. As a result of many of the region’s least developed countries’ over-exposure to one or a small number of commodities, many have become more vulnerable, with knock-on effects on their fiscal situation and indebtedness. The external debt of 17 commodity-dependent developing countries increased by more than a quarter of GDP between 2008 and 2017, according to UNCTAD.

Source: UNCTAD

Most assembly and value-addition (even oil refining) continue to take place in the rich nations and China, not in sub-Saharan Africa. Increasing global financialisation sees predatory core-world banks and shadow financial institutions profiteering in volatile and high-yielding African debt and commodity markets. Strong global economic interests thus militate against intra-continental consolidation. In effect African regionalism must tackle a centuries-old colonial and imperial legacy. 

This is the essential insight of thinkers within the dependency tradition. Nothing about ACFTA will inevitably disconnect Africa from exploitative relationships or core dependence; little about the agreement will compel neoliberal development. It is the functioning of the global economy, with its inbuilt mechanisms for profit-generation, that will continue to shape the character of African economic evolution - although “from the first moment to the last, the lonely hour of the ‘last instance’ never comes.” 

For this last reason none of the points of caution noted in this piece make up decisive arguments against ACFTA; indeed the bloc aims precisely at tackling many of the well-known obstacles highlighted. The tenth of sub-Saharan countries that aren’t resource-dependent may pull others with them -- and the growth in renewables may even free some African resource producers from colonial relationships. A growing working and middle class increasingly demand change, perhaps, alongside ACFTA, a distant echo of Nkrumah’s pan-Africanism. In shaping future trade relations, democratic transformation and pressure of the popular voice become all the more imperative. 

A sense of realism and the enormous legacy of centuries of colonialism only throw into sharp relief the mountain that Africa has to climb. Continental solidarity is surely a waypoint in the region’s rise.