Africa: Benefitting from the AfCFTA - A Manchester Trade-sponsored Discussion

(file photo).
interview

Prudence Sebahizi of the African Union Commission, Stephen Lande of Manchester Trade – a Washington-based advisory firm – and I recently got together for a chat before trading under the African Continental Free Trade Area (AfCFTA) started on January 1, 2021. These renowned international trade and investment experts concurred that only a deliberate effort to craft a cross-Atlantic dialogue would close the information gap between U.S. direct investment abroad (USDIA), and most of all, that American companies stand to benefit significantly under the new trade regime.
Prudence Sebahizi, Chief Technical Advisor on the AfCFTA at the African Union; Image courtesy of Prudence Sebahizi

After a week of the activities to start trading, people on both sides of the Atlantic continue to high expectations in a trade regime that seeks to resolve Africa’s current spaghetti bowl of trade arrangements. It matters less that they do not have all the details. What matters is that Prudence and Stephen are both experts in their respective fields; the AfCFTA and the business between the U.S. and Africa.

The Promise of the AfCFTA
With its on-going effort to grow its footprint in Africa, the American private sector sees the AfCFTA as an avenue to expand infrastructure networks, value chains, and distribution channels from the Cape to Cairo and from Mombasa to Mostaganem (in Algeria). Equally, although African countries continue to grapple with the on-going global pandemic, conventional wisdom suggests that these developing countries will leverage the AfCFTA to claw back from COVID-related disruption.

While America’s policy towards trade and investment with Africa remains somewhat constant, it is incumbent upon the in-coming Biden Administration to change the fact that unlike their Chinese, Canadian, or even Mexican counterparts, American firms have preferential access to less than 10 percent of the world’s consumers. As Shannon O’Neil suggested, Biden ought to prioritize the U.S.’ re-entry into the Comprehensive and Progressive Agreement for the Trans-Pacific Partnership (CPTPP). Even if the original TPP presented the Obama Administration with challenges in dealing with labor unions, the AfCFTA presents, perhaps, a less controversial opportunity for the United States marshal market access to over 1 billion Africans.

American Investment, Substantial Transformation, and the AfCFTA Rules of Origin
There are three ways in which American companies can benefit from AfCFTA. U.S companies could, for starters, produce goods in compliance with AfCFTA origin rules for sale in Africa. In this case, while some may suggest that seeking to produce goods in Africa affects jobs in the United States, the pandemic has proven that logistical and production networks are much more critical than where production is located. Besides, the AfCFTA origin rules can significantly increase the preferential access that American firms have to African consumers. Technically, these origin rules cover 82 percent of all products that originate from a member state if it has been wholly obtained within Africa or has undergone a substantial transformation on the continent.

I sought to clarify what ‘substantial transformation’ meant. Prudence explained that the AfCFTA recognized a product as substantially transformation if member state firms leveraged their production processes to add a specific amount of value to materials not originating on the continent.  Stephen chipped by saying that the type and amount of value-added stipulated in the cocoa-to-chocolate value chain were different from that in the cotton-to-cloth or the milk-to-cheese value chain.

Overall, a large percentage intra-African trade already exists under duty preferences existing in regional economic communities. Regional blocs such as the Common Market for Eastern and Southern Africa (COMESA), East African Community (EAC), Economic Community of West African States (ECOWAS), and Southern African Development Community (SADC) have almost wholly liberalized their trade in goods or have, at least, committed to eliminate duties on almost all their intra-community trade in goods.

Secondly, based on AfCFTA-induced economies of scale combined, U.S. investors can competitively produce goods in AfCFTA member states for export to the American and other third-country markets. These products would enter the U.S. and third-country markets under preferential regimes such as the African Growth and Opportunity Act (AGOA) for the United States and the Economic Partnership Agreements (EPAs) or Everything But Arms (EBAs) for Europe.

As the theory and practice go, trade positively correlates with foreign direct investment (FDI). Hence, on top of producing goods, American investors could take advantage of the AfCFTA by investing in activities stimulated by the newfangled regime such as American distribution chains distributing African goods throughout the continent. USDIA could go into African infrastructure, upgrading skills and capacity building, financial deepening, and the other services that Americans have a comparative advantage over third countries.

On Being Ready to Trade Under the AfCFTA and Other Technical Details
But would the AfCFTA tariff schedules apply to all countries party to the AfCFTA? Is there an available list of AfCFTA-eligible products?  Also, I wanted to know – in layman’s terms – how the African Union would help the world understand the AfCFTA’ s liberalization process. Prudence agreed that what should have been a friendlier and much-simpler procedure for the business community is more convoluted because some countries are ‘readier’ than others to remove or loosen restrictions on the free flow of goods (and services). Whereas 54 of Africa’s 55 countries have signed the AfCFTA agreement, practice shows that less than 54 of the signatories started to trade under the AfCFTA on January 1, 2021.

To explain: There are two requirements for a country to take advantage of the AfCFTA. First, a country must submit to the AfCFTA Secretariat a schedule of the goods it intends to liberalize. Fortunately, because 33 African countries already belong to a customs union, the respective regional bodies submitted tariff schedules on behalf of their member states.[1] Alongside the 33 countries, eight countries – Democratic Republic of Congo (DRC), Egypt, Madagascar, Malawi, Mauritius, Sao Tome &Principe, Seychelles, and Zambia submitted tariff schedules on their own.

The second requirement to trade under the AfCFTA is that member states must ratify the agreement and deposit their ratification instruments to the AfCFTA Secretariat. Thus far, only 26 of the 33 customs union countries have approved and deposited their ratification instruments.[2] Outside the customs unions, Djibouti, Egypt, Ethiopia, Saharawi Republic, Zimbabwe, Sao Tome & Principe, Mauritius, Angola, and Tunisia have ratified and deposited their instruments. According to the Trade Law Center, Somalia and Algeria are yet to deposit their instruments, while Zambia may have obtained its ratification[3].

With these complexities, questions remain on what all these different tiers mean. In the first place, Stephen suggested that since the customs unions had notified the AfCFTA Secretariat of their common external tariff, this tariff schedule was binding. In this case, whether a member state had ratified or not, the non-ratifying member state was bound to extend AfCFTA benefits.

Of course, we must also ask how an importing customs union member would treat goods from an AfCFTA member state that is yet to ratify the AfCFTA. Would that country respect the customs external tariff and provide the AfCFTA tariff rate? Alternatively, what happens to the goods of a customs union member state that is yet to ratify the AfCFTA? Are these goods eligible for AfCFTA preferences? I suggested that in such a case, the importing country would have the option of either charging MFN rates or the AfCFTA preferential rate on imports if otherwise eligible. Other experts like the UN Economic Commission for Africa (ECA) ‘s David Luke had a different interpretation. But all that is up in the air for the moment and we shall still need to clarify many more things.

Prudence and Stephen, again, tried their best to patiently explain that the AfCFTA considered scenarios where not every customs union member state was not yet ready to ratify or submit their individual tariff schedule. Illustratively, suppose a Tanzanian managed to export their goods from Tanzania (which has not ratified the AfCFTA but whose tariff schedules were submitted under the EAC) to Cameroon (which has ratified and submitted its tariff schedule under CEMAC). In that case, the Tanzanian exporter will have to pay levies at the Cameroonian point of entry. Before January 1, 2021, Tanzania would be under no obligation to do anything for this exporter. However, after January 1, 2021, the Tanzanian will be entitled to a tax refund from Tanzania, a refund that must be disbursed within a three to six-month period.

It is important to note that AfCFTA member states agreed to establish and contribute to an escrow provision/fund to eventually compensate the business communities if they (the member states) did not undertake timely AfCFTA ratification. Stephen and I agreed that this was a practical pressure point.

What the Private Sector Ought to Know
Holistically, the AfCFTA provides that 90 percent of the tariff lines under which a country imports must be subject to duty reductions on January 1, 2021. Therefore, whether a customs union is comprised of both LDCs and non-LDCs, it must eliminate duties on 90 percent of its tariff lines by the fifth anniversary of AfCFTA implementation (by January 1, 2026). Interpretively, each of the four customs unions must reduce their common external duties by 20 percent the first year and each year after that. In this case, even if they do not belong to an African customs union, non-LDCs like Egypt and Mauritius must reduce their duties by 20 percent. However, Sao Tome and Principe and Zambia – which are both LDCs – will be subject to a less rigorous tariff schedule, reducing their duties by 10 percent per annum, and will have altogether eliminated their duties on 90 percent of their tariff lines by the tenth anniversary of the AfCFTA.

Secondly, the AfCFTA origin rules cover 82 percent of all products that originate from a member state if it has been wholly obtained within Africa or has undergone a substantial transformation on the continent. The remaining 18 percent shall be agreed upon by June 2021. Similarly, products regulated by Sanitary and Phytosanitary (SPS) provisions and those for processed and manufactured products must be certified as meeting AfCFTA requirements.

Thirdly, exporters in all 55 African countries should study AfCFTA tariff schedules to know which products are eligible for AfCFTA preferences. Equally important is that the private sector understand the details akin to the AfCFTA certificates of origin and the Single Administrative Document. These are already online.

Additionally, exporters must determine if the African country they are exporting to has either agreed to or ratified the AfCFTA. It is their responsibility to establish if their products are entering the other country under a tariff line notified to the AfCFTA Secretariat as being subject to the first tranche of duty reductions and, if so, what duty rate would be applied. If the exporter is shipping a product with more than de minimis amounts of non-African import, it must be determined if the agreed-upon origin rules apply to the product. Exporters must then decide whether or not they can obtain the required documentation before shipping their products.

In the end, one has to give credit to the African Union. Even the European Union did not have as many countries at the negotiating table. The AfCFTA is hoping to resolve border issues in over 1,000 formal and informal border posts. If this isn’t one of the most arduous trade tasks outside the World Trade Organization (WTO), I do not know what else there is to laud.

Notes & Footnotes:
Ms. O’Neil’s opinions can be found in the Foreign Affairs edition of January/February 2021 under the title: Protection without Protectionism: Getting Industrial Policy Right
[1] In this case, the Economic and Monetary Community of Central Africa (CEMAC) submitted schedules for Cameroon, the Central African Republic, Chad, the Republic of Congo, Equatorial Guinea and Gabon. The East Africa Community (EAC) submitted the schedules for Burundi, Kenya, Rwanda, South Sudan, Tanzania and Uganda. The Economic Community of West African States (ECOWAS) submitted Mauritania’s tariff schedule alongside its fifteen-member states, Benin, Burkina Faso, Cape Verde, Cote d’Ivoire, Gambia, Ghana, Guinea, Guinea-Bissau, Liberia, Mali, Niger, Nigeria, Senegal, Sierra Leone, and Togo. The world’s oldest customs union, the Southern African Customs Union (SACU) did likewise for Botswana, eSwatini, Lesotho, Namibia, and South Africa.
[2] Benin, Botswana, Burundi, Guinea-Bissau, Liberia, South Sudan, and Tanzania have not yet submitted their ratification instruments.
[3] Libya, Morocco, Comoros, Mozambique, Sudan, and Eritrea have neither ratified, nor submitted tariff offers. Eritrea has not signed the AfCFTA.

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