NIGERIA AND AFRICA CONTINENTAL FREE TRADE AGREEMENT

Introduction

Free Trade Arrangement (FTA) is a treaty where the trading partners are mutually preferential to trade with one another without trade barriers such as tariffs and other trade blockades. The systematic formulation of FTA is always initiated by deliberate dialogues among the trading partners to ascertain the feasibility of such a treaty. If successful, the member states in the FTA eradicate tariffs and some non-tariff trade blockades over a specified period. Basically, participants mostly design rules of origins that deals with the originality of what constitutes the product manufactured within the FTA to identify its eligibility to receive duty-free and other preferential trade treatment. Rules of origin prevent products from non-members entering an FTA market over the lowest tariff wall. Most FTAs also include procedures on the settlement of disputes arising among members and rules on the implementation of border controls, such as product safety certification and sanitary and phytosanitary requirements. Most recent FTAs contain rules on economic activities besides trade in goods, including foreign investment, intellectual property rights protection, treatment of labour and environment, and trade in services.

Preferential trade arrangement is always initiated by Free Trade Areas, which could flow to the final phase called the Economic Union. The different phases are explained as follows:

• Free Trade Areas: Member states eliminate tariffs and non-tariff barriers on traded goods within the FTA, but respective participant maintains its trade policies including tariffs on trade with non-member regions.
• Customs Unions: Members conduct free trade among themselves and maintain common tariffs and other trade policies with non-member countries.
• Common Market: Members incorporate custom union with the elimination of barriers on the free movement of labours and capital across national borders within the market.
• Economic Union: Members merge their economies further by establishing a common currency and maintain a unified monetary policy, with other common economic institutions.

The European Union is the most significant example that has graduated from Free Trade Areas to an Economic Union.

What are the purposes of the PACTS?

Let us begin with a simple scenario. Suppose country X imports homogenous goods from Y and Z, country X has external tariffs applicable initially to import from countries X and Y. Once the Free Trade Agreement is formed between Country X and Y, external tariffs apply only to import from country Z. This means when country X eliminates its tariffs on imports from country Y, suppliers can then sell its products in country X at the prevailing domestic price. With the elimination of the barrier to internal trade, the price in country X falls, which create excess demand for country Y. Notably, the FTAs scenario is more wide-ranging in reality.

Countries formulate free trade areas for a number of economic and non-economic reasons. Conspicuously, FTAs permit the products of the pact partners easier access to one another’s market by the elimination of tariffs and non-tariff barriers. It is identified that 1989 FTA between the U.S. and Canada was formed perhaps for this purpose.

Similarly, developed economies have established FTAs with the developing economies towards trade and investment liberalization agenda. FTAs may be used to protect local exporters from losing out to foreign companies that could be treated preferentially under other FTAs (Grossman, 2016). For example, some U.S-Chile FTA supporters argued that U.S. firms were at a disadvantage over their Canadian competitors whose exports are exempted from Chilean tariffs under the Canada-Chile FTA.

A further incentive for FTAs was the slow advancement in the multilateral agreements. For example, when the Uruguay Round dialogues came to a halt in 1986-1994, the incentive to develop NAFTA seemed to boost for the U.S., Mexico and Canada.

In addition, political considerations also shape the motive behind FTAs formulation. The U.S. established FTAs with Israel and Jordan to reiterate American sustenance towards these countries and reinforce ties with these nations (Grossman, 2016).

Possible Outcomes of the Free Trade Agreement

Most economists have founded their assessment on the influence of FTAs on the perception of trade creation and trade diversion. This analysis was initiated by Jacob Viner in 1950 whose work explored the economic effect of the customs union and his conclusion has been mostly applied to FTAs and other preferential trade pacts.

Trade creation is said to be the position where an FTAs member replaces its domestic production with the imports of goods from trading partners because the creation of the FTAs has made imports economical compared to the native production. This event could improve the economic welfare of the trading partners since the resources have shifted to more efficient use (Siriwardana, 2007).

While trade diversion is the shift from the imports of goods from an efficient non-member of FTA to a less efficient member for the removal of the tariffs within the trading partner has made the importation prices cheaper than the efficient non-trading partner (Russ & Swenson, 2019).

In most cases, it appears that FTAs lead to both trade diversion and trade creation with the net effects determined by the structure of the FTA. Therefore, even if two or more countries are moving toward freer trade among themselves in an FTA, the FTA could make those countries and the world as a whole worse off if the FTA diverts more trade than it creates, according to economic theory (Maggi, 2017).

Why African Continental Free Trade Agreement (AfCFTA)?

Despite the abundance of mineral assets residing in Africa, the continent currently accounts for only 2.4% of the world gross domestic product (GDP) while the region is plagued with deepest levels of poverty. In addition, many of the 55 African countries are slight with less than 10 million and less than $10 billion of GDP making the nation markets trivial for investment patronage and domestic trade (World Bank Report). African trade remains 3% of global trade, and intra-African trade is about 12% or less, while North American Free Trade Area accounts for 40%, 63% between countries in Western Europe and 30% in Association of Southeast Asian Nations (World Trade Organization, 2011).

Over the years, African leaders had recognized that cooperation and integration among Member States in the economic, social and cultural fields are indispensable for continental developmental aspirations This is why the Post-Independence era saw African governments embracing the idea of regional integration, initially mainly for political reasons and later as a development strategy to confront the challenges of (a) small markets, (b) land-lockedness and to (c)benefit from economies of scale in production and trade. Without economic integration, the continent risk further marginalization under the existing a multi‐polar world dominated by trading blocs in North America, Europe, South‐East Asia and China (Aremu, 2019).

On January 2012 Summit of Heads of States and Government endorsed the Action Plan on Boosting Intra African Trade (BIAT) and decided on the establishment of Africa Continental Free Trade Agreement by an indicative date of 2017. Again, Heads of State and Government on the 4th of July, 2017 decided “to undertake nationwide stakeholders’ sensitization activities” among other decisions.

The African Continental Free Trade Area (AfCFTA) is said to have market coverage of 1.2 billion people and a gross domestic product (GDP) of $2.5 trillion, across all 55 member States of the African Union. In terms of numbers of participating countries, AfCFTA will be the world’s largest free trade area since the formation of the World Trade Organization. It is also a highly dynamic market. The population of Africa is estimated to reach 2.5 billion by 2050, which comprise 26% of what is projected to be the world’s working age population, with an economy that is estimated to grow twice as rapidly as that of the developed world. With average tariffs of 6.1 per cent, businesses currently face higher tariffs when they export within Africa than when they export outside it. AfCFTA is designed to progressively eliminate tariffs on intra-African trade, making it easier for African businesses to trade within the continent and cater to and benefit from the growing African market, hence giving member countries a competitive advantage.

African leaders held an Extraordinary Summit on AfCFTA from 17-21 March 2018 in Kigali, Rwanda. The following legal instruments constituting the AfCFTA, were signed by the majority of African Union Members include: The Agreement Establishing the AfCFTA, the Protocol on Trade in Goods, the Protocol on Trade in Services, and the Protocol on Rules and Procedures for the Settlement of Disputes. The signing took place during the 10th Extraordinary Summit of the Assembly of the AU. on 21 March 2018 in Kigali, without Nigeria. By signing the first stage AfCFTA agreement, the first building blocks of the required inter-state legal framework is being put in place.

The African Continental Free Trade Area (AfCFTA) Agreement is set to enter into force on 30 May 2019. This date marks 30 days after the 22nd instrument of ratification was deposited with the Chairperson of the African Union Commission. The 22 countries that have deposited their instruments of AfCFTA ratification with the AUC Chairperson are; Ghana, Kenya, Rwanda, Niger, Chad, Congo Republic, Djibouti, Guinea, eSwatini (former Swaziland), Mali, Mauritania, Namibia, South Africa, Uganda, Ivory Coast (C?te d’Ivoire), Senegal, Togo, Egypt, Ethiopia, The Gambia, Sierra Leone and Saharawi Republic. Additionally, Zimbabwe has received parliamentary approval for ratification but has yet to deposit its ratification instruments with the AUC Chairperson.

With the 22 countries ratification, any country that intends to join the trade treaty would be by ACCESSION in accordance with the World Trade Organization GATT Article XXIV. Aremu (2019) identifies the disadvantages of the refusal to sign the treaty by Nigeria, which include: (1) the economy would suddenly feel left alone as she will be separated from the most members of the continent including ECOWAS (2) From the inception of the treaty, no country pays attention to Nigeria as further critical decisions on AfCFTA has continued (3) Nigeria must know that she can no longer be hanging around in the Afro-centric kind of foreign policy, as its non-membership of the AfCFTA has disproved the genuine commitment to such position (4) the AfCFTA appears to be the only legal mandate upon which Nigerians and their business activities can be permitted to remain in non- ECOWAS African Member States

Conclusion

While manufacturing is a major focus in trade debates, services are also important: tradable business services like legal services, consulting, financial services, accounting, architecture, engineering, healthcare, and education. Trade pacts are not only limited to opening the country's borders to free movement of goods but also the movement of other factors of production. Interestingly, it has been acknowledged that trade in service is progressively imperative in the global economy. Trade in services has grown faster than the trade in goods since 2005. Frankly, Nigerian valuable product lies in her human capital. If the government embraces the trade treaty, it will allow the nation to transport her services to other regions that are in dire need of them, which will reduce the unemployment rate and foster personal remittance.

Note: It is important for Nigeria to get involved in levelling the playing field. However, it is recommended that the government does sufficient ‘homework’ (revising the country's trade policy and drafting sustainability goals) before making commitments.

Disclaimer: This article is primarily intended to create public awareness for public engagement and not for decision making.

References

Aremu, J. A. (2019). Sequencing and Negotiating Nigeria’s Regional Trade Agreements and International Trade Agreement. Covenant University 20th Inaugural Lecture. 9(3).

Grossman, G. M. (2016). The Purpose of Trade Agreements, 1, 379–434. https://doi.org/10.1016/bs.hescop.2016.04.016

Maggi, G. (2017). International Trade: International Trade Agreements. Handbook of International Economics (Vol. 4). https://doi.org/10.14097/j.cnki.5392/2017.02.034

Russ, K. N., & Swenson, D. L. (2019). Trade Diversion and Trade Deficits: The Case of the Korea-U.S. Free Trade Agreement. Journal of the Japanese and International Economies, 52(October 2018), 22–31. https://doi.org/10.1016/j.jjie.2019.02.001

Siriwardana, M. (2007). The Australia-United States Free Trade Agreement: An economic evaluation. North American Journal of Economics and Finance, 18(1), 117–133. https://doi.org/10.1016/j.najef.2006.07.003

World Trade Organization. (2011). World Trade Report 2011: The WTO and Preferential Trade Agreements: From Co-Existence to Coherence. WTO, Geneva.