29 March 2018

Africa: Will Africa's Huge New Trade Deal Really Transform the Continent?

Photo: The New Times
Smale-scale traders at the Rubavu-Goma border post transact business (file photo).
analysis

Africa took a giant step forward, at least symbolically, on 21 March when 44 of the African Union's (AU) 55 member states signed the African Continental Free Trade Agreement (AfCFTA) in Kigali, Rwanda. This evoked the captivating image of a vast market embracing all of Africa, with its 1.07 billion people and a combined nominal GDP of US$3.3 trillion.

But much time, effort and no doubt bitter wrangling remains before the vision comes close to reality. No surprise therefore that much was made of the failure of Africa's two largest economies, South Africa and Nigeria, to sign the agreement.

As far as South Africa is concerned, that omission seemed to be about procedures only. Trade and Industry Minister Rob Davies explained this week that Pretoria couldn't under its own laws sign an incomplete agreement, with no tariff schedules in place and other annexes and protocols not yet finalised. But he was pretty certain that South Africa would in time sign up. And there is little reason to doubt him, as South Africa would probably be the biggest beneficiary of a continent-wide free market.

For bigger states, is the AfCFTA about keeping big outside competitors like China and India at bay?

Already, as Davies pointed out, his country exported US$23.5 billion worth of goods to the rest of Africa in 2017 and imported only US$8.6 billion, racking up a huge trade surplus of US$14.9 billion. Greater market access would no doubt increase South Africa's exports and surely also its surplus. Probably ditto for Nigeria.

The real question, then, is: What are the benefits for most of the smaller nations that did sign the agreement, sight unseen as it were, because the critical details aren't yet in it - like the rules of origin? Do these minors have the same interests as the major players?

Theoretically such regional free trade agreements benefit all member states. And they could. But for the bigger states, one senses that the rationale for the AfCFTA and other regional agreements is more to keep big outside competitors like China and India at bay.

So it was not surprising that Davies said South Africa would participate in the forthcoming AfCFTA negotiations to ensure those rules of origin prevented non-African producers taking unfair advantage of the deal. They could do that by exporting large quantities of almost-finished goods into Africa where a button or two could be sewn on so the goods qualified as locally produced. The items could then be sold duty-free to the rest of the continent.

That would defeat the whole object of the AfCFTA - to create larger markets, stimulate regional value chains and diversify and industrialise Africa's own economies, he said.

But will Davies's view also be the view of those smaller economies that don't already have much productive capacity? Or would some of them rather get the cheaper Chinese and Indian goods anyway, since they aren't producing very much themselves?

In the European Union (EU), smaller states have indeed greatly benefited from the open market. The important difference is that most, if not all, EU states have significant production capacity.

Under the new free trade deal, African countries will have access to a billion-person local market

The answer from the big players to the implied question from the small states about what we get out of this seems to be 'value chains'. As Davies put it, the AfCFTA is intended to stimulate regional production value chains whereby raw materials produced in one or more member states are progressively transformed into finished goods in or by one or more other member states.

This is similar to the existing or evolving regional free trade agreements such as the Tripartite agreement which is merging the Southern African Development Corporation, the East African Community and the Common Market for Eastern and Southern Africa.

Davies said South Africa wouldn't mind other African countries taking over some of its value-added production space through the opening up of its markets under the AfCFTA. South Africa would then move up the value-added production chain to support broad based industrial development in Africa.

He makes a good theoretical case for the AfCFTA. Many economists, perhaps of the neo-liberal school, offer South Korea's phenomenal export-driven growth from the 1960s onwards as an example for Africa to emulate. Others suggest it should go a more Chinese route by mass-producing low-end goods using cheap labour.

The latter has been tried here and there. Some European companies are moving to North Africa, for example, to take advantage of cheaper labour. And, as China moves up the value chain, it has moved some production of lower-end goods to countries like Ethiopia. However Jakkie Cilliers, head of African Futures and Innovation at the Institute for Security Studies in Pretoria, says in general African labour is too expensive for this Chinese option.

And Davies says the days are gone when Africa could have emulated South Korea by exporting large volumes of goods to the developed world. Not only because those developed world markets are no longer growing very fast, but because they are increasingly erecting non-tariff barriers in the form of standards and the like.

Africa should make itself attractive to investors, and exploit whatever opportunities it can

As a result, major producers like China and India were increasingly turning to their domestic markets to fuel industrial growth, Davies said. Africa's problem hitherto had been the small size of the markets of the 55 AU member states - a legacy of colonialism, he said. But with the AfCFTA, Africa now had the prospect of a billion-person market, which put it in the same league as the likes of China and India.

And sovereignty is not the only non-tariff barrier. As Davies acknowledges, the persistent hardness of colonial borders derives not so much from the tariff barriers which the AfCFTA will hopefully dismantle. The real barriers are poor infrastructure and inadequate productive capacity. He could have added inefficient and corrupt customs control and excessive red tape at borders - probably the single major cause of delays, and costs, in moving goods around Africa.

The philosophical underpinnings of the AfCFTA, at least as Davies envisages it, are also debatable. Are the developed world markets really such a closed door to Africa in the future, as he suggests? Southern and other regions of Africa have just concluded economic partnership agreements with the EU - which are free trade deals at their core. South Africa, for one, has done well in its exports, especially of value-added goods, to the EU.

South Africa has also done well in exporting value-added goods to the United States (US), taking advantage of preferences under the African Growth and Opportunity Act. These are subject to the whim of a protectionist president like Donald Trump - as we are now seeing with the big import tariffs being slapped on South African steel and aluminium exports to the US.

No doubt. But economics are inherently uncertain. Purely on the basis of demographics, Africa could become the market of the future, with some predictions that the African market could approach four billion people by 2100 - while Europe would continue to decline in relative economic significance.

But numbers are not everything. Africa would be unwise to wait for nirvana. It should not allow state-led economic development plans, however convincing, to circumscribe opportunity. It should make itself as attractive as possible to investors, and exploit whatever opportunities it can, wherever they arise.

Peter Fabricius, ISS Consultant

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