August 17, 2018

African Continental Free Trade Agreement—Will It Work?

Small states have more influence than expected over the development of free trade.

Forty-four of the 55 member states of the African Union signed the African Continental Free Trade Agreement (AfCFTA) on 21 March 2018. Ratifying the agreement would make the African Continental Free Trade Area the largest free-trade area in the world in terms of participating countries. 1.2 billion people live in the area it covers, and consumers and businesses would spend over four trillion US dollars a year. The parliaments of 22 member states must ratify the agreement for it to enter into force. So far, six have done so: Chad, Ghana, Kenya, Niger, Rwanda and Swaziland.

The purpose of the AfCFTA is, like other such agreements, the establishment of a single market for Africa’s goods and services and to permit the free movement of workers and people across the continent. The aim is to eliminate 90% of tariffs, with the end result being a customs union. Removing barriers to intra-African trade would enhance business between African countries by increasing investment, economies of scale and access to Western markets.

Everything looks splendid from the outside, but there are many disruptive factors that may rain on Africa’s parade. The two main challenges are larger African countries satisfying their self-interest and Regional Economic Communities (RECs) in which a free trade area has already been established.

When the agreement was concluded, two of Africa’s largest economies—Nigeria and South Africa—did not sign it, although after reviewing the agreement again in detail, the latter ultimately decided to do so. Another major issue is the protocol on free movement, which was signed by only 27 countries; most of the larger economies did not.

Africa’s leading countries have historically been those with strong economies such as South Africa, Nigeria and Kenya in Sub-Saharan Africa and Egypt and Algeria in the North. South Africa and Nigeria are not members of any existing regional economic community where free trade agreements (FTAs) have been established; Kenya, on the other hand, sees the secret of its success in its participation in the East African Community (EAC) free trade area and the Common Market for Eastern and Southern Africa (COMESA), and has already ratified the AfCFTA.

Instability and political crises in countries with larger economies have recently reduced their influence and increased their wish to differentiate themselves from others. Large countries are important initiators and developers of free trade processes. In addition to major economic or political powers, medium-sized forces have also emerged, such as Ghana, Tanzania, Mauritius, Rwanda, Uganda, Namibia, Senegal, Côte d’Ivoire, Botswana and Zambia, who support regional integration and see it as an important part of their development strategy.

Major countries in Africa often try to put their self-interest first. Few have understood that if a neighbour does well and it is possible to trade with them, then it is in their interests as well. For example, Nigeria did not join the AfCFTA because it believes that not joining results in getting better contract conditions more easily.1 Medium-sized nations know that their development depends on larger markets and cooperation and this is the reason for their keen interest in being part of FTAs.

When people talk about influential African countries, Nigeria and South Africa usually head the list. Nigeria (with a GDP of 376 billion US dollars) and South Africa (GDP 349 billion dollars) are the largest economies in Africa.2 Nigeria is the most populous country on the continent, with almost 200 million people living there. It has large oil reserves and over 90% of the economy is linked to the exploitation of hydrocarbons. Economic growth has been hindered by low oil prices, corruption, and a bad economic environment that is confirmed by the country’s ranking as 145th in the World Bank’s Doing Business Index. Since 2009, Nigeria has been fighting the jihadist group Boko Haram in a struggle that has claimed tens of thousands of lives and forced over two million citizens to relocate. Nigeria has also shown its importance to the European Union, when President Muhammadu Buhari asserted that Nigeria would not sign the Economic Partnership Agreement (EPA) between the EU and West Africa, claiming that the Nigerian market was too sensitive and not ready for free competition. This decision not only impeded Nigeria’s trade with the EU but also that of 16 other West African nations.3 Nigeria is a member of the Economic Community of West African States (ECOWAS), hosts the organisation’s head office in Abuja, and president Buhari has just (31 July) been elected ECOWAS Chairman.

Alari Paluots / PM

South Africa has the second-strongest economy on the continent, but under its former president Jacob Zuma it was stagnating and the country’s credit rating was turning to junk status. In the international arena, South Africa is the only African country that is a member of the G20. It joined the BRIC group (Brazil, Russia, India and China) in 2010 and is the only strategic partner of the EU in Africa. South Africa is a founding member of the UN and it participates in various peacekeeping missions. South Africa played a major role in the six-nation Southern African Development Community (SADC) and in the EU, setting up the EPA with the region. The EPA gives the area tariff-free quotas for exports of agricultural products to the EU. One obstacle to benefitting from the EPA has been non-compliance with phytosanitary requirements. South Africa is one of the leading states in the African Union, and Nkosazana Dlamini-Zuma was Chair of its Commission from 2012 to 2017.

These two countries are highlighted because such large states can be the driving or arresting force of the AfCFTA. Opening up such large markets would be a major boost to developing intra-African trade. In addition, Nigeria’s example shows how a country with a strong economy can impede processes.

A new phenomenon is emerging in Africa—the size of a country or its economy is no longer the only indicator of influence. If we look at smaller countries that can multiply their influence, Rwanda is definitely in the forefront. Twelve million people live in Rwanda’s 26,000 km² territory and its per capita GDP is 700 dollars. Rwanda’s development has been led by President Paul Kagame, who has brought the country from post-genocide chaos to be one of the most influential nations in Africa.4

Rwanda has used an interesting strategy to increase its influence: posting its boldest and brightest to lead assorted international and regional organisations. A member of the EAC, Rwanda contributed to the community’s management with the appointment of a pragmatic former Rwandan diplomat as its Secretary-General (2011–16). At the same time, President Kagame involved neighbouring Kenya and Uganda to expedite EAC integration in the fields of energy, transport and tourism. The African Union is currently chaired by Rwanda, and president Kagame leads its reform process as the Chairperson. Kagame led the UN Secretary-General’s group of advisers on the Millennium Development Goals (MDG) and is co-chair of the International Telecommunication Union’s Broadband Commission. The doctor from Rwanda has also served as president of the African Development Bank. Rwanda has been a non-permanent member of the UN Security Council and is the third-largest contributor to UN peacekeeping in terms of personnel. Rwanda has nominated its foreign minister, Louise Mushikiwabo, to be Secretary-General of La Francophonie and has gained the support of president Macron of France and the African Union.

It was decided to modernise the country’s economy (4G internet, e-solutions and e-state), at the same time helping the poor break free from poverty. The e-state is developing quickly in Rwanda and over 100 e-services are already available. Rwanda is ranked 41st in the World Bank’s Doing Business Index, much higher than Nigeria and South Africa (82nd). For the past several years, Rwanda’s economy has grown at an annual rate of 7–8%. In addition to the EAC, Rwanda is also a member of the Common Market for Eastern and Southern Africa (COMESA) and the Economic Community of Central African States (ECCAS). Rwanda and president Kagame gave a huge boost to the AfCFTA process because a single African free market is in the interest of small dynamic states. President Kagame made the agreement his responsibility during his chairmanship of the African Union and lobbied his colleagues. This is a great example of how a small state can be a positive influence on big politics. One can hope that the next chairperson pushes the ratification of the agreement with the same enthusiasm.

What Effect Does African Regional Politics Have on the AfCFTA?

Let us talk a little about Regional Economic Communities (RECs). The African Union, a continent-wide union of states, recognises eight RECs: the Arab Maghreb Union (UMA), COMESA, the Community of Sahel-Saharan States (CEN-SAD), the EAC, the ECCAS, ECOWAS, the Intergovernmental Authority on Development (IGAD) and the SADC. RECs have emerged at different times and with different agendas. The African Economic Community was established by the Abuja Treaty in 1991 and its main task is coordinating the activities of RECs.

The Arab Maghreb Union was established by the Marrakesh Treaty in 1989. Member states are Algeria, Libya, Mauritania, Morocco and Tunisia. Due to complicated relations between the members, UMA has come to a standstill.

The Common Market for Eastern and Southern Africa was established in 1993 and its HQ is in Zambia. Member states are Burundi, the Comoros, Democratic Republic of the Congo (DRC), Djibouti, Egypt, Eritrea, Ethiopia, Kenya, Libya, Madagascar, Malawi, Mauritius, Rwanda, the Seychelles, Sudan, Swaziland, Uganda, Zambia and Zimbabwe, and, since July this year, Somalia and Tunisia. The purpose of COMESA is to facilitate trade between member states. In 2000, nine member states established a single market and eliminated tariffs. “Towards Digital Economic Integration” was the theme of the summit held in July 2018 at which proposals were made to digitalise the single market by developing e-commerce, e-logistics and e-laws/e-state. COMESA is one of the few functional free trade communities in Africa and it supports the AfCFTA even if all its member states have not joined.

The Community of Sahel-Saharan States was established in 1998 by six countries: Burkina Faso, Chad, Libya, Mali, Niger and Sudan. Its purpose was to promote trade between the states but also to facilitate integration in the cultural, political and social spheres. In ten years, the Community grew to 29 member, by which time it was clear that implementing a free trade area would be almost impossible. The majority of member states already belonged to other economic communities and free trade areas. The Arab Spring and the crisis in Libya, which hosted the community’s HQ, further exacerbated the situation. CEN-SAD has not been active in recent times.

The East African Community was re-established in 1999 by three founding members—Kenya, Tanzania and Uganda—in Arusha, Tanzania. A customs union was created in 2005 and a single market was established in 2010. Rwanda and Burundi joined in 2007, and South Sudan in 2016.

In recent years, a lot of effort has been put into eliminating non-tariff trade barriers. For example, a truck driving from Kigali to the port of Dar es Salaam had to pass through 12 checkpoints, often leading a company to incur additional expenses. Now the same journey only entails two or three checkpoints. EAC member states have approved declarations and strategies to establish a monetary union and a political federation, but a constitutional political crisis in Burundi, Tanzania’s concerns about the growing influence of its stronger neighbour Kenya, and the latter’s unstable political situation have brought further integration to a standstill. The EAC came to an agreement with the EU in 2014 during the EPA negotiations, but only Kenya and Rwanda have signed the EPA. The status of EAC member states affects signing the EPA since all countries except Kenya have the status of least-developed country and already benefit from export tariff concessions originating from the EPA. Thus, only Kenya is interested in concluding the EPA quickly.

The Economic Community of Central African States was established in 1983 and, after a long hiatus, was re-established in 1998. Its headquarters is in Gabon and the members are Angola, Burundi, Cameroon, Central African Republic, Chad, the Republic of the Congo, the DRC, Equatorial Guinea, Gabon, Rwanda and São Tomé and Príncipe. ECCAS has had more of a coordinating role for the activities of its member states and has facilitated economic cooperation. A strategic plan up to 2025 was adopted in 2015 with the aim to promote peace, solidarity and equal development in the ECCAS area and to foster the free movement of people, goods and services within it. Integration is complicated by crises in several member states: Burundi, Cameroon, Central African Republic and the DRC.

A joint summit with the ECOWAS states was held in July 2018, where leaders discussed promoting peace, security and stability and the fight against terrorism and violent extremism in the region. Some ECCAS member states also belong to the Economic and Monetary Community of Central Africa (CEMAC). Six countries have created a monetary union, its main accomplishment being the adoption of a single currency, the Central African CFA franc. For several years efforts have been made to promote integration, but so far to no avail.

The Economic Community of West African States was established in 1975 with the aim to promote the all-round economic integration of the region. It is headquartered in Nigeria and the members are Benin, Burkina Faso, Cape Verde, Côte d’Ivoire, the Gambia, Ghana, Guinea, Guinea-Bissau, Liberia, Mali, Niger, Nigeria, Senegal, Sierra Leone and Togo. ECOWAS is working to become an economic union. Members have agreed on a joint policy in fields such as ICT, energy, political cooperation, infrastructure, water and agriculture. ECOWAS organises peacekeeping missions in the region and has sent peacekeeping forces to the Gambia, Sierra Leone and Liberia. EPA negotiations with the EU ended in 2014, and only Nigeria and the Gambia have not signed the agreement. The Gambia has promised to join the EPA, but Nigeria is still not ready to sign it, to the frustration of other member states.

The Intergovernmental Authority on Development was established in 1996. In addition to economic cooperation, IGAD has political aims, for example regional food security, management of natural resources, peace and defence. IGAD members are Djibouti (HQ), Eritrea, Ethiopia, Kenya, Somalia, Sudan and Uganda. IGAD has recently played an important role in conflict prevention and crisis mediation. Its long-term strategy is to become the main economic community of the region.

The Southern African Development Community was created in 1992 as an economic community with a strong component of political integration. The SADC is certainly the most influential political community in Southern Africa, but it has not shown much will for economic integration. Its HQ is in Botswana. Member states are Angola, Botswana, the DRC, Lesotho, Madagascar, Malawi, Mauritius, Mozambique, Namibia, the Seychelles, South Africa, Swaziland, Tanzania, Zambia and Zimbabwe. South Africa is the leading member of SADC and is increasing its influence through the community. SADC has entered into the EPA with the EU, but work must be done to derive more benefit from the FTA.

Free trade in Africa is further complicated by the FTA entered into between COMESA, EAC and SADC in January 2018. The decision to open negotiations was taken in 2008. Twenty-two of the 26 member states have signed the agreement; in order for it to enter into force, however, 14 states have to ratify it. The FTA between COMESA, EAC and SADC has potential because two of the RECs—COMESA and EAC—already have working free trade markets. A functioning agreement between these groups would establish a free trade area from Egypt to South Africa and from the DRC to Ethiopia.

The reader will certainly have noticed that the RECs and their member states overlap to a great degree. The RECs have different aims and are in various stages of development. Major obstacles to regional integration are posed by the states in crisis, through domestic military conflict, civil war, domestic political struggle or just bad economic conditions. What do successful free trade areas have in common? A strong core of small or medium-sized states that have wider influence than their size or economy would reasonably suggest. There are no large countries that act against their own interests. The regions consist of countries that recognise the importance of regional economic integration in their development.

Given these criteria, the AfCFTA has the potential to speed up the economic development of the continent. Right now, an influential head of state is at the helm of the process and even large member states have changed their minds and joined the agreement. It remains to be seen whether Nigeria comes along with the process or tries to hinder progress.

Why Does This Matter to Estonia?

Estonia has gone through the same stage of development that many African states are in now. Estonia made the decision to liberalise its economy even before joining the EU’s free trade area and it knows very well how free trade helped the country’s development. Now is the right time to look for business opportunities in view of the opening-up of markets in Africa, and several Estonian companies are already doing so.

Estonia has several opportunities:

  • share its experience of free trade and economic reforms
  • sell e-state and e-government solutions
  • help countries to improve their position in the Doing Business Index
  • share opportunities to develop financial and tax systems.

______

1 www.cnbc.com/2018/05/14/nigeria-is-leading-on-pan-…

2 en.wikipedia.org/wiki/List_of_African_countries_by…

3 edition.cnn.com/2018/04/06/africa/nigeria-free-tra…

4 www.afriem.org/2016/01/africas-10-most-influential…