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First step on a long road to African free trade area

First step on a long road to African free trade area

The parallel developments in the European Union (EU) and Africa of regional trade blocs and free trade areas make for an interesting and potentially ironic study as Africa seeks to open its markets to intercontinental trade after years of barriers, and Europe, or at least the British element of it, could be seen to be doing the opposite.

Of course it isn't that simple, as in terms of trade into Africa everyone is happily embarking on the new scramble for the continent for a whole range of geopolitical and economic reasons. It is indeed sometimes hard to keep up with the visits of May, Merkel and Macron, through OPIC, Belt and Road to TICAD. But the impact of African Continental Free Trade Area ("AfCFTA") Agreement is certainly potentially and theoretically huge for Africa, practically and emotionally.

The AfTCFA seeks in grand scale to unite 1.2 billion people, around 54 nations and a gross domestic product (GDP) of more than US$ 3.4 trillion under a single tariff free continental market. Enacted in 2018, it has been signed by 52 African member states to date. On 2 April 2019, Gambia became the 22nd country to ratify, meeting a key threshold for entry into force.

The Treaty is the first, albeit very significant, step on a long road to creating a continental free trade area. As such, it creates a governance framework for its institutions and rules. It encompasses an overarching agreement setting out the AfCFTA's institutional structure, supplemented by three trade protocols on goods, services and dispute settlement. Interestingly, the latter provides a framework to be agreed for settling trade disputes arising between State Parties, including a mechanism that is to a considerable extent based on the dispute settlement system of the World Trade Organisation.

There is no doubt that it is critical, at a time when intra African trade amounts to only 15% of the world’s GDP, as compared with 67% in Europe. The lack of scale of most independent countries on the continent inhibits growth (and especially development of in-country industrial base), it is cheaper to get some ingredients from China than the next door neighbour, and it is said to be easier to get around the continent with a US passport than a Malian one.

The AfCTCA has lofty ambitions to deal with these issues, especially to eliminate tariff and non-tariff barriers and increase intra Africa trade to 50% by 2063, which will be helped by the effective legitimisation of much grey trade. Steps are already being taken (e.g. through Afrexim funding) to smooth the issues of loss of tariff income for example.

However, whilst most claim that free trade is a "no brainer”, Nigeria have declined to sign the EPA with the EU in 2018 and have declined to ratify the AfCTA.

Nigeria has one of the largest economies on the continent and has around 210 million people, so its failure to enter into the agreement is challenging, and Nigerians have expressed concerns about opening up its borders to competition. The reasoning given in Nigeria varies but embody a complex concern that Nigeria and (it follows) the rest of the continent are not ready for it. The arguments include –

  • Nigeria needs to get its house in order in economic, corruption, security and political terms;
  • There is no "equivalence" across the continent allowing the barriers to come down ( an argument supported by references to EU and  Greece);
  • Currency instability;
  • There is no effective guarantee of enforcement; and
  • Nigeria needs first to be capable of adding value to products in country and reduce its comparatively high manufacturing cost base.
  • Indications are that the mood in Nigeria may be turning as the trade minister recently announced that they "do not want to find the train has left the station".

So whilst much needs to be done to perfect the AfTCA, not least in agreeing the thorny issue of trade protections, the overriding view remains that it is a critical initiative for a continent which needs to move forward with industrialisation and continental trade. With the rest of the world looking to invest and influence in Africa the sooner a concerted approach can be taken to take advantage of the opportunities the better.

Written by Andrew Skipper, Partner and Head of Africa Practice at Hogan Lovells