Africa's Continental Free Trade Agreement: A Burgeoning Business Opportunity or just the Latest Palaver?

Originally written for the Africa Business Portal and published there on May 7th, 2018

* With the 31st African Union Summit (25 June - 02 July 2018) having just wrapped up in Nouakchott, Mauritania, this seems a good time to revisit the topic.

July 3rd, 2018

While the summit was underway, Burundi, Lesotho, Namibia, South Africa and Sierra Leone signed the AfCFTA in Nouakchott. This makes 49 of the current AU 55 member states to sign the agreement. Chad and Swaziland also ratified the agreement in Nouakchott, raising the number states that have also ratified the treaty to to six. At least 22 must ratify the agreement in order for the AfCFTA to come into force. However just 15 ratifications are necessary for the protocol on free movement of persons, right of residence and right of establishment to come into effect.

With so much activity and things approaching reality, there is a lot of enthusiasm around the continent among elites, many seemingly convinced the AfCFTA will solve all Africa's development issues. Not to be a wet blanket, but here is a news flash: it will not solve Africa's woes. Yes, when adhered to, it can make a significant difference. But it will not take long for states to retrench to protect their economies when confronted with an avalanche of imported goods and labor from neighboring countries. Who will police that eventuality? What will be the consequences of backsliding?

I stand by my original article on the matter (see below) and, while cautiously optimistic, remain a skeptic.

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At a special summit in Kigali, Rwanda on March 21st, 2018, representatives of 44 African countries signed the "Kigali Declaration," a promise for signatories to ratify the African Continental Free Trade Agreement (AfCFTA), a long hoped for pact to harmonize trade across Africa. Is this good news? Will it lead to broader African development, industrialization and trade liberalization? Should non-Africa actors care or be interested? Will this simplify or complicate entry into African markets?

“The promise of free trade and free movement is prosperity for all Africans because we are prioritizing the production of value-added goods and services that are made in Africa” 

-- Rwandan President Paul Kagame, Chairman of the African Union (AU)

President Kagame's hopeful assertion aside, there are many, many questions about this very ambitious agreement. The declaration, a 253 page document, is loaded with lots of good ideas. But ideas are, well just ideas. In order for them to be effective, African governments must accept, adhere, embrace and enforce all the elements of the pact. Will they? This is the $64,000 question. 

Africa suffers from underdevelopment, in part a legacy of a paucity of intra-Africa trade. Since the end of the colonial era, few states have traded with their neighbors. This is, in part, understandable when one accounts for historic ties to former colonial powers who were interested in trade between the Metropolitan and their colonies, not between colonies. That pattern continued for decades after independence. It is this legacy Africa must overcome, along with all its attendant patterns and issues.

The key objectives for AfCFTA include:

? Create a single continental market for goods and services to foster;

   - free movement of business persons and investments

   - establishment of the Continental Customs Union

? Expand intra-African trade

   - trade liberalization (remove tariffs and barriers)

   - facilitation regimes and instruments across regional economic communities (RECs)

The Tripartite Free Trade Area is only getting started now; a welcome development on a continent with the lowest inter-region trade levels (less than 10% of African trade)

? Resolve multiple and overlapping regional organization membership challenges

   - expedite the regional and continental integration processes

Multiple, overlapping Regional Economic Communities are not well, or frequently, at all integrated for intra-Africa trade

? Exploit opportunities for scale, continental market access and better reallocation of resources

All of that sounds good, in principal. Historically, one of the key reasons U.S. businesses have overlooked Africa is the perception that there are 54 separate, distinct, unrelated markets with complicated access. This perception has not been reality for a number of years. That perception is your father's Oldsmobile, not today's Tesla.

For the past couple of decades, RECs have made considerable progress opening up markets and integrating trade on a regional level. The Southern African Development Community (SADC), East African Community (EAC) and Economic Community of West African States (ECOWAS) have been the most successful. In many ways much of SADC is an extension of South Africa's economy. Intra-regional trade in the EAC has grown dramatically in the past decade. 

The point is that RECs have been making significant progress on many of the issues AfCFTA intends to address. Which brings us to one of the problems with AfCFTA. The Kigali Declaration seems to support and simultaneously conflict with the RECs: listing them as "building blocks for AfCFTA" (Article 5, Principles) while Article 20 gives primacy to AfCFTA. That is an inconsistency that will undermine the pact.

While AfCFTA may very well lead to lower trade barriers, removal of tarrifs and possibly even economies of scale (all of which I remain somewhat skeptical about), it is enterprise oriented. A glaring shortcoming is the neglect of consumers. "Conspicuously missing from the AfCFTA discussions is the aspect of consumer protection. Consumers have a right to information, the right to safety protection, the right to the protection of economic interests and the right to redress. These rights are designed to protect consumers from unscrupulous vendors who may prey on consumers’ lack of knowledge or low bargaining power." If you do not protect the consumer in a modern economy, you inhibit potential growth. If a consumer cannot have confidence in products, trade is retarded.

Is a single market even a genuine desire? I warn Africans: buyer beware. Africa has its own regional China's: Nigeria, South Africa and Ethiopia immediately come to mind. Each has the economic heft and industrial capacity to overwhelm its regional neighbors and, potentially, the continent too. Given free access, removal of protectionist measures in many markets, these regional hegemons can easily overwhelm local producers and manufacturers. Trade liberalization will favor the big boys. So a presence in each of them will be advantageous for a US firm.

There are many other questions about AfCFTA, but I will briefly highlight just a few of them:

? Extra-Africa trade

   - What about external actors (Turkey, China, EU, USA, Japan)? How will AfCFTA affect external trade?

   - Existing bilateral and multilateral agreements

   - What of special trade deals like many EU countries have with their former colonial possessions?

   - What about preferential treatment the US gives to many African states under the Africa Growth and Opportunity Act (AGOA)?

? Intellectual Property (IP)

   - The pact addresses this, but who will enforce it? One can buy virtually any pirated music or film on DVD almost anywhere in Africa. It is hard to believe that passage of the pact will change that anytime soon.

? Functioning courts for redress of grievances or breach of contract?

   - Aside from a very few countries like South Africa, Rwanda and Nigeria, bringing a court case against a transgressor in the business sector is difficult, if not impossible. A continental trade agreement is dependent on the rule of law and functioning court systems, little of Africa can meet that standard now or for the foreseeable future.

? Protectionist African Markets

   - As I mentioned above, many smaller states (and even larger ones still to this day) have sought to protect the local market against outside competition. How will the AfCFTA regime change this? How will we get genuine reform? Is that even a good idea?

   - Many states will not embrace economic or trade liberalization for fear of the damage to their domestic economies

I have posed a number of reasonable questions and one might suggest I read the agreement; I have (it's a lot to read folks). To be fair, much of what I address is included in the Kigali Declaration. However, one must accept on good faith that all signatories will comply with the agreement. That is a bit much to expect. There will be backsliding by large and small states. When that occurs, what next? This is the conundrum. The AU lacks genuine political authority (as resident in Brussels for the EU). 

I may seem negative on AfCFTA; I am not. I am actually very encouraged by the agreement. But I am also realistic about the coming challenges. That said, one can make a reasonable argument that it is already a limited success even prior to coming into force (which occurs when 22 states ratify the pact). The tremendous amount of press coverage of AfCFTA has African trade in the news. This is a good thing. Africa needs more attention. A continent about to explode from 1.3 to 2.4-2.6 billion people by 2050 presents a tremendous economic burst from now to 2050. Much of the world's growth will be in Africa over the next few decades. 

Another positive development is that 27 countries also signed the Protocol on Free Movement of Persons and the African Passport. This regime will lead to an explosion of movement across the continent and could help get talent where it is in demand as the economies of Africa mature.

On balance, AfCFTA is a big step in the right direction for Africa. I just offer a word of caution to not expect too much too soon. The challenges one sees today entering a bilateral or regional market will remain for some time. However, AfCFTA will eventually make a difference and potentially simplify doing business in Africa, especially for those firms with a presence somewhere on the continent, as intra-African trade is the focus of AfCFTA. 

If AfCFTA begins to make a positive difference for external actors, than one need focus heavily on the traditional security hazards in Africa, what I call C3 (crime, coups, chaos).

Chris Wyatt, May 7th, 2018, Carlisle, PA