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Monday, 18 November 2019

INTERVIEW: Towards the African Continental Free Trade Area

Bineswaree Bolaky, co-author of the UNCTAD Economic Development in Africa Report 2019, tells Niveen Wahish why rules of origin are necessary to the success of the African Continental Free Trade Area

Niveen Wahish , Friday 26 Jul 2019
Bineswaree Bolaky
Bineswaree Bolaky
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The African Continental Free Trade Area (AfCFTA) was officially launched on 7 July in Niamey, Niger, at the African Union (AU) Summit of Heads of State, after the minimum number of 22 ratifications by AU member states required for it to enter into force materialised.

The AfCFTA, which will potentially consist of more than 1.3 billion people with a combined annual output of $2.2 trillion, is projected to bring immense development opportunities and socio-economic gains to the continent by creating a single continental market for goods and services, Bineswaree Bolaky, co-author of the United Nations Conference on Trade and Development (UNCTAD) Economic Development in Africa Report 2019, told Al-Ahram Weekly.

UNCTAD estimates that AfCFTA could, in its transition phase alone, generate welfare gains of $16.1 billion and boost intra-African trade by 33 per cent. Moreover, the removal of tariffs, supplemented by trade facilitation in the African Continental Free Trade Area, could lead to intra-African trade to increase by 52.3 per cent or $34.6 billion in 2022, compared with a baseline scenario of not having a free trade area, said the UN Economic Commission for Africa (UNECA), according to Bolaky, currently an economic affairs officer at UNECA.

These gains depend on member countries granting tariff-free market access to each other’s goods, provided these goods are made within the AfCFTA, said Bolaky, explaining that goods produced within the AfCFTA are given “preferential” treatment and are subject to zero import tariffs.

As the UNCTAD report makes clear, preferential trade liberalisation is the main instrument for delivering on the expected gains of the AfCFTA, she said.

“This is where rules of origin come in… to ensure that goods are indeed made within the AfCFTA,” she said, explaining that rules of origin define the criteria to ascertain the origin of goods. They define the “economic nationality of goods,” and they are the cornerstone for the effective operationalisation of the AfCFTA.

Negotiations on the contents of these rules of origin are ongoing. The fact that rules of origin differ across Africa’s eight regional economic communities (RECs) and countries have overlapping REC memberships mean that African enterprises must comply with a different set of rules of origin, depending on which REC countries they are trading with.

“This raises transaction costs and costs of doing business for African firms, and these costs may be substantial for small enterprises,” Bolaky said. Nonetheless, she said there was scope for existing rules of origin on the continent to move towards greater regulatory convergence and be made more business friendly and trade facilitating.

The report advocates for rules of origin that are simple, transparent, predictable and trade-facilitating for businesses and trade operators, she stressed.

If rules of origin are too complex or too restrictive, African firms may prefer to forego utilising tariff preferences available to them under such arrangements and trade instead with the rest of the world, she said.

The report also argues that rules of origin should consider different levels of productive capacities and competitiveness among countries, in order to make regional integration an inclusive process in which weaker countries such as the Least Developed Countries (LDCs) can participate and help foster regional production, Bolaky said.

A key expected benefit of regional integration arrangements is to foster the development of Regional Value-Chains (RVCs) and allow a range of countries to participate as providers of intermediate inputs, the co-author said.

This is where the scope for boosting intra-African trade lies, not only in final goods trade but also in intermediate and intra-industry trade, she added.

CHALLENGES

One of the challenges faced in the implementation of rules of origin, according to Bolaky, is compliance with the rules of origin provisions for direct shipment and certification requirements due to the constraints related to transportation networks and customs capacity in Africa.

This highlights the need for customs modernisation and trade-facilitation reforms, she said.

She pointed out that evidence based on surveys conducted by the International Trade Centre in 23 developing countries (13 in Africa) and LDCs in the period 2010-2013, for instance, indicated that for manufactured products, 35 per cent of the most difficult non-tariff measures applied by partner countries to manufacturing exports concerned rules of origin and the related documentation.

Despite difficulties, Bolaky does not believe African countries need a whole new set of rules of origin, however. “It will be optimal for existing rules to be used as a basis for improvements,” she said.

In the Agreement Establishing the African Continental Free Trade Area, AU member states reaffirmed their existing rights and obligations under the other trade agreements of which they are members, Bolaky pointed out. Moreover, the agreement considers the free-trade agreements of the regional economic communities as building blocks and recognises their best practices.

According to Bolaky, the UNCTAD report highlights that it is critical to formulate simple, understandable rules of origin for stakeholders such as private operators, firms, brokers and customs authorities can apply them cost effectively. “If the language of the rules is overly complex, users will prefer to avoid risks and not use the arrangement, which would undermine the AfCFTA,” she said.

Moreover, AfCFTA negotiators need to account for regional and country-specific sensitivities. And these rules must be crafted with the future in mind, to avoid renegotiations and updates that may present challenges for governments and private-sector operators, and to account for future enhanced capacity in countries in Africa to participate in value chains.

The report also makes a case for AfCFTA rules of origin to take into account the capacity constraints of LDCs.

Rules of origin in the AfCFTA and the RECs should be framed and applied in order to achieve the development goals set out in the Abuja Treaty of 1991 and the goals of Africa’s Agenda 2063: The Africa We Want, stressed Bolaky. These goals include boosting intra-African trade, fostering industrialisation and the development of regional value-chains on the continent in order to support long-term economic growth and job creation.

The AfCFTA and the RECs should adopt rules of origin that will support the realisation of such goals.

African rules of origin should not be more restrictive and costlier to comply with than those of these external trading arrangements, if not, the African private sector may find it more profitable to produce and trade with the rest of the world and neglect market opportunities on the continent.

Establishing regular platforms for public-private dialogues can also be valuable in identifying any implementation issues and periodically assessing the impact of the AfCFTA, Bolaky pointed out.

Bolaky hopes that member countries will soon submit an agreed set of rules of origin. She pointed out that when the Seventh African Union Ministers of Trade (AMOT) meeting took place in Cairo in December 2018 they had agreed to give a six-month extension to negotiators on rules of origin with the expectation to submit an agreed package by June 2019.

“It is probable that the package will be finalised in the coming months,” she said.

While it is expected that the AfCFTA will provide incentives for African producers to trade more within Africa, getting the rules of origin right is not enough on its own. A whole range of complementary policies are needed, such as enhancing productive/supply/industrial capacities to satisfy African demand, addressing Africa’s infrastructure deficit, including improving transport networks to move goods at cost competitive rates across the continent and improving trade and business facilitation, said Bolaky.

Nonetheless, she does not expect intra-African trade to be a substitute for trade with the outside world. “The scope for African countries to increase their trade both outside and inside the continent is huge,” she said.

WORLD PLAYER

According to Bolaky, Africa remains a marginal player in world trade, and for many countries their trade with the outside world remains concentrated in commodity exports.

The share of exports from Africa to the rest of the world ranged from 80 to 90 per cent in 2000-2017. The only other region with a higher export dependence on the rest of the world is Oceania. Conversely, the share of intraregional exports in total exports is lowest in Africa, compared with other regions, except Oceania. Intra-African exports were 16.6 per cent of total exports in 2017, compared with 68.1 per cent in Europe, 59.4 per cent in Asia, 55.0 per cent in America and 7.0 per cent in Oceania.

Regional integration in Africa can be used as a launch pad for African countries to better integrate in the world economy and to increase their volume of trade to the outside world and improve on the diversity of their trade with the rest of the world, away from commodities which remain subject to price cycles and towards manufactures, she said.

Bolaky pointed out that intra-African trade is more intensive in manufactures than the trade of Africa with the rest of the world, the latter being more commodity dependent. Therefore, she hopes the AfCFTA by boosting intra-African trade can give an impetus to manufacturing development in Africa with positive spillover effects on Africa’s manufacturing competitiveness relative to the outside world in the long run.

It is also expected that the AfCFTA will help the continent attract much-needed investments in infrastructure. Addressing such infrastructure bottlenecks will contribute to improve the competitiveness of African exports, both within the continent and outside, Bolaky said.

All African countries, including Egypt, Bolaky said, should ensure that existing rules of origin are not inhibiting their firms from exploiting trade and investment opportunities within the continent and enhance efforts at implementing the provisions of African trade agreements including lowering non-tariff barriers to trade and implementing agreed tariff concessions.

She suggested regular dialogue and consultations as well as the setting up of online mechanisms at a country and regional level to allow the private sector to document complaints on non-trade barriers and rules of origin. This can help to address the concerns of the private sector, which should be the key implementer of regional integration agreements and the main driver of economic activity.

The report recommends that countries harness information and communications technology to enhance transparency in the implementation of rules of origin and lower compliance costs. Moreover, according to Bolaky, it recommends the setting up of an online intra-African trade platform that will provide user-friendly access to a repository of rules of origin provisions in local languages under the African Continental Free Trade Area and regional economic communities in Africa.

Egypt can also set up such a repository at national and decentralised levels to provide easy access to the private sector on information on rules of origin as well as providing training on how to comply with rules of origin, she suggested.

The setting up of AfCFTA help desks could also be useful in facilitating implementation and in monitoring sources of implementation challenges, she said.

Egypt, Bolaky stressed, currently chairing the AU and among Africa’s largest and more industrialised economies, could play a critical role as a leading regional hub in the development of regional value-chains on the continent.

For example, she pointed out, Egypt, along with South Africa are among the few African countries that manufacture chocolate to supply their domestic and regional markets, yet most of their imports of the raw and intermediate inputs such as cocoa beans and cocoa paste do not come from African suppliers such as Cote d’Ivoire.

There is a disconnect in the cocoa-chocolate value chain on the continent and the AfCFTA rules of origin can address that disconnect. While African countries export raw cocoa beans, they import most of their chocolate from outside of Africa. Egyptian chocolate manufacturers could, for instance, import more raw cocoa and cocoa paste from other parts of Africa and scale production of chocolate to supply a larger segment of the chocolate market in Africa.

Besides the rules of origin, there are other obstacles that face intra-African trade. Bolaky pointed out that the AU Action Plan for Boosting Intra-African trade (BIAT) has identified a whole range of obstacles to intra-African trade that include differences in trade regimes; restrictive customs procedures; administrative and technical barriers; limitations of productive capacity; inadequacies of trade-related infrastructure, trade finance, and trade information; lack of factor market integration; and an inadequate focus on internal market issues.

Bolaky stressed the importance of political will in making things happen. “When it comes to trade and regional integration agreements… the devil always lies in the implementation. But then timely and effective implementation rests on political will and political commitment to the regional integration cause,” she said, adding that “without peace, stability and political commitment, the AfCFTA can easily be derailed from attaining its intended objectives.”

The successful operationalisation of the AfCFTA will require governments to go “beyond business as usual” and promote cooperation and dialogue with the private sector and facilitate the setting up of independent, credible, transparent institutions and mechanisms to apply in a coherent, predictable and impartial manner the various provisions of the agreement establishing the AfCFTA.

“The road towards a full implementation of the AfCFTA contains challenges to be overcome amidst a range of potential opportunities to be harnessed,” she concluded.

 *A version of this article appears in print in the 25 July, 2019 edition of Al-Ahram Weekly under the headline: Towards the African Continental Free Trade Area

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