• The new African Continental Free Trade Area is the first large-scale agreement on deep integration in Africa to cover areas such as services, investment, competition policy, intellectual property rights, and digital trade.
• The convergence between regulatory frameworks under the agreement and those of the EU will have a significant influence on European companies’ competitiveness in Africa.
• The EU should respond to the changes the agreement has brought about by engaging in greater cooperation with Africa as a bloc.
• This will require a more coherent approach to EU trade agreements with individual African countries, including through a revision of rules of origin.
• There are many opportunities for EU-AU cooperation on a new trade agenda, particularly the role of trade policy in the green and digital transitions.
• Through technical cooperation and exchanges of experiences, African countries and EU member states should promote mutual understanding of their approaches to regulation.

Introduction

Trade and investment relations with Africa are increasingly important to the European Union’s strategic goals. Given their geographic proximity and historical ties, the EU and Africa should both seek to build the foundations of comprehensive and mutually beneficial economic cooperation – as this would have economic and political benefits in everything from job creation, migration, and security to the green and digital transitions. The EU should engage in such cooperation: it is Africa’s most important trading partner, accounting for around one-third of African trade, and is a vital source of foreign direct investment (FDI) on the continent. Nonetheless, players such as China and Russia have increasing influence on the African commercial landscape, and could weaken the position of the EU as Africa’s leading economic and political partner.

In this context, EU policymakers should view the recent creation of an Africa-wide market under the African Continental Free Trade Area (AfCFTA) as an opportunity to consolidate and strengthen commercial and geopolitical ties with Africa. The AfCFTA, a flagship project of the African Union’s Agenda 2063, is a blueprint for a prosperous Africa that promotes regional integration and structural transformation as a source of inclusive growth, decent jobs, and sustainable development. Given its comprehensive and ambitious scope, the AfCFTA could be the first large-scale effort at deep integration in Africa. The AfCFTA seeks not only to liberalise intra-African tariffs and other traditional barriers affecting trade in goods (shallow integration) but also to address domestic regulatory measures with respect to services, investment, competition, intellectual property rights, and digital trade (deep integration). The degree of convergence between EU and nascent pan-African regulatory models will be critical to the commercial and geopolitical ties between Europe and Africa. Regulatory convergence can lead to the harmonisation of rules of operation and governance, and to an increase in cross-border production chains.

The eventual creation of an African economic community could involve not only a continental customs union with common external tariffs, but also the harmonisation of broader economic policies for all African countries. An African customs union and economic community could shift the EU’s engagement with Africa away from trade cooperation with individual countries and towards that with another bloc. The EU has concluded 16 free trade agreements (FTAs) with sub-Saharan African countries and four with North African states – more than any other power. Yet many, if not all, of these agreements have done little to develop rules that would create a level playing field in areas such as services, investment, competition policy, and intellectual property rights. By contrast, China has only signed one FTA with an African country (Mauritius) but exerts its influence on a wide range of trade issues through non-traditional instruments such as memorandums of understanding.

The EU has an interest in ensuring that the AfCFTA creates markets in Africa that are open, fair, rules-based, and competitive. European firms are increasingly concerned that they will be displaced from these markets by Chinese, Indian, Middle Eastern, or Russian rivals that can benefit from lower technical standards for products and direct government support at home. The rules, regulations, and governance of the trading system under the AfCFTA – and its convergence or compatibility with European standards – will therefore determine the competitiveness of European firms in Africa. Moreover, the AfCFTA can create the conditions for new investment opportunities beyond Europe’s traditional focus on the extraction of Africa’s natural resources. With a stronger regulatory framework for investment, competition, and intellectual property rights, European firms could not only capitalise on the size of African markets but also local advantages such as low labour costs and links to production and trade with the rest of the world. In short, Africa could become a global hub for manufacturing and exports. This may be a particularly attractive opportunity in the aftermath of covid-19, as European firms look to strengthen their supply chains by diversifying them away from Asia and near-shoring them.

This paper explores ways in which the EU can enhance its economic leadership in Africa through mutually beneficial cooperation on trade and investment. This is important to not only the EU’s bilateral relationships with African states but also to its efforts to protect common interests in international forums. Encouragingly, both the EU and the AU have started to explore more shared initiatives in light of the AfCFTA. However, they have yet to jointly set out a substantive approach to such cooperation.

The EU and the AU should implement a dual-track strategy that strengthens their traditional forms of trade and pursues a new agenda. The first track will require the EU to harmonise its existing FTAs with African countries and work to align the development aspects of these agreements with the effort enshrined in the AfCFTA to promote African countries’ exports of more sophisticated goods and services. In this way, the EU can build a balanced partnership with Africa.

The second track will require the EU to cooperate with African countries on the forms of deep integration laid out in the AfCFTA – starting with services, investment, competition, intellectual property rights, and digital trade. Such a partnership for deep integration will be crucial to creating a level playing field for European countries and firms. Furthermore, the AfCFTA will set a precedent for the international trade system under the World Trade Organization (WTO) that both sides support.

In making a case for a dual-track strategy, the paper examines the structure and significance of the AfCFTA; the interaction between the AfCFTA and the EU’s FTAs with African countries; and the current elements of EU-AU cooperation that could become building blocks of deep integration under the AfCFTA. By implementing this strategy, Europe and Africa can promote sustainable development, stability, and security in both regions.

Structure and significance of the AfCFTA process

Established in January 2021, the AfCFTA is a remarkable trade agreement in many ways. It includes more signatory countries than any other such agreement since the establishment of the WTO. At the time of writing, Eritrea is the only one of the 55 members of the AU not to have signed the agreement.

Diverse trade partners

African states have largely driven the ambitious, large-scale effort to establish the AfCFTA. They include developing countries and 33 of the 46 states that the United Nations classifies as the ‘least-developed countries’ due to their low level of income and their severe structural impediments to sustainable development. These countries have limited experience and capacity in conducting technically demanding negotiations, and have traditionally been exempted from reciprocal trade liberalisation in multilateral agreements. For example, East African Community states aside, most African countries had never negotiated the comprehensive liberalisation of services in a trade agreement other than in the WTO’s General Agreement on Trade in Services (GATS), which dates back to the mid-1990s. Mauritius is the only African country that took part in negotiations in the 2010s on a proposed Trade in Services Agreement.

Moreover, despite being widely referred to as a ‘South-South’ trading arrangement, the AfCFTA brings together countries that are significantly different in their levels of development, economic structures, societies, cultures, and politics. The enormous asymmetries among AfCFTA members add to the complexity of conducting an integration process of this scope.

Unprecedented speed and commitment

Despite the difficulties of integrating many heterogeneous partners, the AfCFTA has been negotiated and ratified with surprising speed and commitment. African institutions have pursued continental integration for many decades, but their past efforts were heavily geopolitical. The AfCFTA has brought a fresher, commercially oriented approach.

AU heads of state and government launched the initiative in January 2012 at a meeting in the Ethiopian capital, Addis Ababa. They made the decision to establish continental free trade, leading to six years of negotiations on how to achieve this. Fifty-four countries signed the AfCFTA between 2018 and 2019; only one party to the talks – Eritrea – has not done so. The AfCFTA entered into force in May 2019 for the 24 countries that had ratified it at that that point. As of February 2022, 41 of them had done so. The AfCFTA is not in effect for countries that have yet to ratify it. Those that have ratified the agreement could start trading with one another in line with the tariff concessions and rules of origin it specifies. But, while the agreement became operational on 1 January 2021, there have been delays in negotiations to finalise tariffs and rules of origin. So, in practice, the parties have not yet begun to trade under the AfCFTA regime. Agreed rules of origin currently cover 87.7 per cent of products as defined in the AfCFTA’s lists of tariff rates. And the completion of these negotiations is scheduled for June 2022. When the new trade regime begins, it will effectively remove 90 per cent of trade tariffs. In the following five to ten years, the AfCFTA will liberalise trade by an additional 7 per cent to cover “sensitive products” – that is, those excluded from general tariff liberalisation. As the exclusion of 10 per cent of tariff lines under the agreement could represent a significant share of trade, it remains to be seen which goods this will cover.

It would be premature to declare victory now, at a time when the AfCFTA free trade regime is not fully in place and some of its details are still unclear. Nonetheless, African countries have achieved a lot in the past decade as they move towards a comprehensive and deep FTA.

The progress of the AfCFTA in the past two years is especially impressive given the effects of covid-19, which has complicated and slowed negotiations, and a global retreat from trade integration. The AfCFTA emerged against the backdrop of the indefinite delay of Doha Round negotiations under the WTO; Brexit; countries’ withdrawal from FTAs such as (in the case of the United States) the Trans-Pacific Partnership; a failure to conclude large-scale plurilateral and bilateral negotiations on deals such as the Trade in Services Agreement and Transatlantic Trade and Investment Partnership; and difficulties in ratifying FTAs that have already been signed, such as the EU-Canada Comprehensive Economic and Trade Agreement. On trade, Africa has moved in the opposite direction to most of the rest of the world.

Africa’s first deep integration agreement

Yet perhaps the most important aspect of the AfCFTA is that it is the first agreement in Africa to comprehensively cover deep integration – the expansion of trade policy from traditional goods-only barriers, such as tariffs and quotas, to a broader range of domestic regulations. While there is no universal definition of the term ‘deep integration’, it normally refers to FTAs that cover at least four core areas: services, investment, competition policy, and intellectual property rights – all of which have a strong domestic regulatory dimension. Deep integration shapes the rules for companies operating in Africa on everything from the recognition of professional qualifications and environmental standards in investments to the role of government support and state-owned enterprises. The more these rules align with policy and standards in the EU, the easier it will be for European companies to expand their presence in Africa. Without regulatory standards as high as those in the EU, non-European firms will continue to displace EU companies. In other words, the compatibility of EU and AfCFTA regulations will help determine the competitiveness of European exports and investments in Africa, as well as the overall strength of trade and investment ties between Europe and Africa.

Moreover, while deep integration used to be a characteristic of FTAs between members of the Organisation for Economic Co-operation and Development, most deep integration FTAs signed since 2000 have been between developed and developing countries, while just one-third of them have been between developing countries. But Africa has not contributed to the former trend: the vast majority of African FTAs are shallow integration agreements, meaning that they focus primarily or exclusively on traditional goods-only barriers. Of the eight sub-regional agreements recognised by the AU, only one – the East African Community – covers services. Deals such as the Southern African Development Community’s Protocol on Finance and Investment pursue deep integration issues, but not in the comprehensive manner of so-called ‘twenty-first century agreements’. The AfCFTA may be the first African twenty-first century agreement with a fully fledged deep integration agenda.

Empirical evidence from recent years shows that FTAs are heterogenous – not all of them boost trade to the same extent. Agreements that cover deep integration are associated with greater trade flows, whereas those limited to shallow integration do not. These studies show that the expansion of global value chains is strongly associated with deep integration arrangements. This can be explained by the fact that these value chains require market access (trade) and market presence (FDI), both areas in which domestic regulations are important. As scholars such as Richard Baldwin have demonstrated, the complementarity between services, investment, and knowledge creation is an important part of trade deals that expand regional and global value chains.

The AfCFTA integration process is structured in three phases, all of which cover important aspects of deep integration. One of the more unusual features of the deal is that, from its first phase, it liberalises trade in goods and services in parallel – a departure from the standard practice of sequencing goods before services. This reflects an appreciation of the fact that goods and services are intertwined: as services are a key input in the production of goods, they determine the competitiveness of manufacturing and agriculture. In this regard, one important facet of the AfCFTA is its inclusion of a Protocol on Trade in Services, which contains the agreement’s basic principles for liberalising trade in services. Negotiators plan to finalise the market access schedules for services by 30 June 2022. Although it remains to be seen how far this liberalisation will go, one remarkable element of the protocol vis-à-vis the GATS is that it does not treat developing and least-developed countries differently.

The second phase of the AfCFTA process, which is already under negotiation, will create new protocols on investment, competition policy, and intellectual property rights. Given that none of the protocols in these areas has been completed at the time of writing, it is difficult to assess them. But the scope of the negotiations indicates a coherent approach to such issues. Indeed, measures on investment are closely linked to those on competition and intellectual property rights. Hence, the negotiation of these protocols in tandem can help ensure that policies in these areas complement one another.

The third phase, which has not yet begun, will be devoted to digital trade. As the AfCFTA’s digital trade agenda has a broad scope, this phase could also touch on a variety of issues.

This road map for deep integration has two particularly significant features. Firstly, there is widespread consensus that most of the potential gains from the AfCFTA will come from the removal of non-tariff measures and other elements of deep integration. As services are subject to greater protectionism than any other aspect of trade and FDI, this is the area in which liberalisation can yield the largest economic benefits. And the removal of barriers to services prompts less trade diversion than the liberalisation of tariffs. Beyond such increases in economic efficiency, deep integration is associated with economies of scale, stimulus of investment, and greater competition and innovation.

The other key feature of deep integration under the AfCFTA is that it sets a precedent for future negotiations involving African countries, including those with its European partners in bilateral arrangements and under the WTO. Unlike tariffs and other barriers at the border that can be applied on a preferential basis for different trading partners, many domestic regulatory reforms linked to deep integration are de facto applied on the basis of most-favoured nations and national treatment – that is, without discrimination between foreign trading partners or between domestic and foreign firms respectively. Accordingly, once a regulatory reform begins at the domestic level, it will mould the commitments a country may be willing to make in future trade agreements. The negotiations and reforms that 54 African countries are undertaking through the AfCFTA integration process will inevitably influence their commitment in future FTAs with the EU, as well as with other members of the WTO under the multilateral trade regime.

Interaction between the AfCFTA and other African trade agreements

The establishment of the AfCFTA has implications for pre-existing trade agreements in Africa, both at the sub-regional level in the framework of Regional Economic Communities, as well as between African countries and extra-regional trading partners such as the EU. As discussed, the EU has far more trade agreements with African countries than any other external partner. It is important that European policymakers understand how these agreements and future ones can shape the AfCFTA integration process.

The benefits of open regionalism

The existence of parallel and even overlapping trading arrangements is not unique to Africa: in the past two decades, there has been a worldwide proliferation of regional and bilateral accords that created multilayered trade regimes. The experience of countries that operate in such multilayered trading landscapes suggests that the response should not be to reduce the number of FTAs but to ensure that they are coherent and complement one another as the building blocks of broad liberalisation.

The concept of open regionalism emerged from Asia-Pacific efforts to address these challenges of complexity. This openness, a departure from the inward-looking focus on import substitution that prevailed in first-generation regional trade agreements, involves a greater emphasis on outward-oriented and internationally competitive strategies. The concept was later endorsed by Pacific countries in Latin America as a way to promote the convergence of diverse initiatives at the subregional, regional, and hemispheric levels, and to adopt an orientation towards the rest of the world based on less rigid, non-exclusive trading partnerships.

On a large scale, FTAs are often vital building blocks of deep integration. These agreements can function as experimentation labs for deep integration, as they have produced many measures that have gone on to be adopted more widely. Even the first agreements on non-tariff measures under the WTO – which concerned technical barriers to trade and sanitary and phytosanitary measures – emerged from deals between smaller numbers of countries in the Tokyo Round of talks on the General Agreement on Tariffs and Trade (GATT). It is hard to believe that these and other aspects of trade regulation would have developed without these initial steps. In this sense, the coexistence of FTAs among smaller groups of countries can help develop the AfCFTA, particularly as it expands to new regulatory horizons in keeping with the demands of a rapidly changing global economy.

Furthermore, not all trade-related issues lend themselves to continent-wide cooperation. Sometimes, international cooperation is most effective on a bilateral or sub-regional scale. For example, there may be little benefit in countries in southern Africa negotiating transport facilitation measures with those in the north of the continent. Such issues are best addressed in sub-regional arrangements rather than the AfCFTA.

But this is not the only reason why regional and bilateral agreements will complement continental arrangements under the AfCFTA. This is the case also due to increasing political cooperation between African states on issues ranging from human rights and disarmament to nature conservation.

Yet, while there are clear benefits to open regionalism, it is important that this openness does not divert attention away from the AfCFTA or otherwise delay or complicate its implementation. It is also important to avoid duplication and inconsistency between agreements, which can raise administrative costs for governments and create confusion and uncertainty for businesses. Therefore, while open regionalism can create useful synergies within the continental integration process, these benefits are not automatic – they require policy coherence and consistency across co-existing trade agreements.

Policy coherence and consistency in the AfCFTA

The AfCFTA addresses the importance of policy coherence and consistency with existing – and, presumably, future – FTAs in Africa. Article 3 of the agreement discusses the need to resolve the problem of “multiple and overlapping membership”, but it does not provide further guidance or mechanisms for doing so. For example, the AfCFTA does not specify whether it or another agreement takes precedence in cases of inconsistency in commitments and rules.

Article 5 of the AfCFTA explicitly describes the FTAs of the Regional Economic Communities (REC) grouping as its “building blocks”. The AfCFTA states that it aims to preserve – and, if possible, improve – what has been agreed on trade within the grouping. Moreover, Article 12 of the AfCFTA specifies that the REC “shall be represented in the Committee of Senior Trade Officials, in an advisory capacity”.

While more precise plans and rules will be required for the REC to blend into the AfCFTA’s architecture, this is a clear recognition of its role in shaping the agreement. Yet the REC contains vastly different models, with some of its members not having signed FTAs with one another and some claiming that the grouping is a customs union or even a common market. So, the REC model for the AfCFTA is unclear. The AfCFTA’s recognition of the need to co-exist with the REC in the long term reflects a desire for different regions to pursue deeper or complementary policies that are tailored to local needs (in areas such as environmental programmes, energy, water, policing, nature conservation, and political cooperation).

The REC’s trade arrangements are the only ones the AfCFTA explicitly describes as building blocks. That said, Article 19 of the AfCFTA states that its signatories “that are members of other regional economic communities, regional trading arrangements and custom unions, which have attained among themselves higher levels of regional integration than under this Agreement, shall maintain such higher levels among themselves”. Accordingly, the AfCFTA stipulates that it will co-exist with regional trading arrangements and custom unions such as those under FTAs between the EU and African countries. The AfCFTA does not abolish any EU trade arrangements with African states or prevent them from expanding or deepening these arrangements.

The constructive role of EU-Africa trade arrangements

The EU’s plethora of trading arrangements with Africa would benefit from greater alignment with those under the AfCFTA and the REC. They could do so in the following ways.

A whole-of-Africa approach

One of the challenges of moving to an intercontinental strategy is that EU trade policy on Africa is fragmented – in terms of its treatment of least-developed and developing countries, and of countries to the north and south of the Sahara. These differences in the EU’s multitude of African trading arrangements could deter region-wide integration. Moreover, the economic and geographical divisions in these arrangements may be outdated or operate differently from the AfCFTA and other AU initiatives. The fragmented approach can create challenges for EU trade policy in engaging with Africa as a single region.

The EU reformed its Africa policy at the turn of the century. Under the successive Lomé Conventions (1975-2000), the EU provided African, Caribbean, and Pacific exporters with greater market access than it had under the Generalised System of Preferences that it applied to other developing countries. These preferences were challenged under the GATT because they involved discrimination between developing countries. In response, the EU adopted in 2001 the Everything but Arms (EBA) initiative, which granted duty-free and quota-free access to most products from least-developed countries. In contrast, the EU policy on states other than least-developed countries focused on the negotiation of economic partnership agreements (EPAs) to preserve this market access. The Cotonou Partnership Agreement is part of the EU’s trading framework with 79 countries in Africa, the Caribbean, and the Pacific.

The split in treatment of least-developed countries and other states in sub-Saharan Africa created tensions and difficulties in the EU’s negotiation of economic partnerships with the REC. Most members of the REC are least-developed countries, which have no incentive to participate in reciprocal negotiations with the EU. This explains why the union’s EPAs have limited scope even when they carry the name of the REC. For example, the EPA with the Southern African Development Community only includes six of its 16 member states (and will include just four in its second phase). In other instances, the union has negotiated EPAs with a group of countries that does not correspond to the REC, such as eastern and southern Africa. Given that trading arrangements under the REC act as building blocks of the AfCFTA, the EU should align its agreements with the grouping.

In North Africa and the Mediterranean, the EU’s many trade regimes include Association Agreements, Deep and Comprehensive Free Trade Areas (DCFTAs), and the Generalised System of Preferences. Given that the sub-regional arrangements would have been complicated by tensions between North African countries, it is understandable that the EU concluded bilateral trade agreements with Tunisia (1998), Morocco (2000), Algeria (2002), and Egypt (2004). These agreements are part of the Barcelona Process and the Euro-Mediterranean Partnership, which form part of the European Neighbourhood Policy. Following the 2011 Arab uprisings, the EU launched new negotiations on DCFTAs with Tunisia, Morocco, and Egypt. Although some DCFTAs seemed to progress well – particularly that with Tunisia, which advanced in the negotiation of services – they have also run into difficulties and suffered from the same problems as EPAs.

The problem with negotiating free trade agreements individually is that, in the absence of coherence and coordination between them, this approach risks fragmenting tariff regimes across Africa. One of the problems with EU agreements in Africa, even under EPAs, is that they have different rules of origin – which can complicate the expansion of supply chains. Therefore, the EU should revise rules of origin in its trade agreements to remove an obstacle to intercontinental integration.

Making structural transformation a shared development goal

The UN’s Sustainable Development Goals and the EU’s transition from a donor-recipient model to partnership-driven cooperation indicate that Europe and Africa should pursue a common development model in their trade relations. The AfCFTA and the AU’s Agenda 2063 emphasise the importance of FTAs in structural economic transformation. For several reasons, EPAs can inhibit such transformation by making it more difficult for countries to implement targeted industrial policy. After decades of EU-Africa trade relations, two-thirds of African exports to the EU are of primary goods and raw materials. Similarly, EU investments in Africa are largely in the extractive sector. In contrast, intra-regional trade is characterised by the movement of more complex goods and services. There is a widespread perception that decades of trade cooperation with the EU have failed to nurture the structural transformation needed to spur productivity growth.

Classical economic theory dictates that, in conditions of perfect competition, free trade is optimal for small economies. Yet, given that most African economies experience domestic policy distortions or market failures, they may benefit more from restrictions on trade and FDI. Nonetheless, if all African countries were to take such an approach, the outcome would be inefficient on a continental scale. Furthermore, as the effective application of strategic trade and FDI policy has substantial informational requirements, attempts to address market failures with trade policy instruments can lead to governance failures. For this reason, it is often wise to avoid using such instruments.

However, Asian countries such as Taiwan, South Korea, and Japan have used these instruments effectively – as have those in other regions. Therefore, African states should be given the policy space to use second-best trade policy instruments while they develop more effective measures, such as stronger competition policy advanced under the AfCFTA. The WTO allows exceptions under ‘infant industry’ and other provisions that apply to developing countries. The EU’s trade arrangements in Africa could be more flexible on the use – where justified – of strategic trade and FDI policy to promote structural economic development.

Building blocks of the new trade agenda

While it is straightforward to conceive the building blocks of a traditional, goods-focused trade agenda (in areas such as rules of origin), the EU needs to engage in innovative thinking about how to do so for deep integration. Given that an intercontinental FTA is a long-term objective, it is important to go beyond tariff concessions and rules of origin to promote cooperation on the trade agenda of the future. Much of the challenge in trade policymaking in the subsequent phases of the AfCFTA will centre on regulatory issues – especially in areas such as services, investment, competition, and intellectual property rights. Cooperation on these deep integration issues will be critical to ensuring that European firms compete in African markets on a fair and equal footing. Moreover, these policy domains are vital to the green and digital transitions.

In developed and developing countries, services account for almost half of world trade – and this share is growing fast. As discussed, one of the most important achievements of the AfCFTA is that it intertwines goods and services. This reflects African policymakers’ increasing appreciation of how transactions costs created by inefficient services reduce African economies’ competitiveness and development. Moreover, most African workers – including most women and staff of small and medium-sized enterprises – are employed in the service industry. As a result, services are indispensable to inclusive growth.

All these trends indicate why EU and African policymakers need to create new ways to cooperate in services trade. The EU should use its extensive experience in dealing with regulatory issues as a building block of the AfCFTA. However, instead of expecting African countries to adopt EU regulatory models, the union should help them create robust regulatory frameworks of their own. This will be particularly important in technological development (especially the growth of the digital economy), which will lead to greater convergence in the sides’ policy reforms.

Conclusion: Convergence between EU trade policy and the AfCFTA process

The AfCFTA has created a new layer of complexity in African trade but also new opportunities for mutually beneficial economic cooperation between the EU and Africa. The EU needs to revitalise its trade strategy for Africa in response to the agreement. This is even more crucial due to the impact of covid-19 – which has hampered trade and FDI flows, and has created incentives to diversify and near-shore global supply chains. The EU also needs to contend with the fact that competition from China and other actors poses an increasing challenge to European companies that operate in Africa. The union’s efforts in these areas should run along two parallel tracks: the traditional agenda and the new agenda.

Traditional trade agenda

The EU needs to unify its trading regimes with African countries (under the EBA, EPAs, DCFTAs, Association Agreements, and the Generalised System of Preferences) and ensure they are consistent with the AfCFTA. This undertaking should focus on the revision of rules of origin – which is particularly timely given that the AfCFTA negotiations on this issue will conclude in the coming months. Harmonised rules of origin would be an important building block of the traditional trade agenda.

As the AfCFTA lacks a customs union and the sovereignty to negotiate trade policy on behalf of AU members, talks on intercontinental market access will not be possible in the near term. In the meantime, the EU’s attempts to standardise EPAs and DCFTAs should help pave the way for a unified trade policy regime in Africa.

The AfCFTA is concerned not just with the expansion of trade but also with upgrades to the structure of trade and FDI. This is important given the empirical evidence that countries trading in complex goods and services have higher GDP growth than those that do not. By ensuring that FTAs create space for targeted industrial policy, the EU would promote economic convergence between Europe and Africa while supporting the development objectives of the AfCFTA.

New trade agenda

There is an urgent need for innovative thinking on how to create new building blocks of a trade regime covering services, as well as its connections to the green and digital transitions. The challenges of the AfCFTA will increasingly concern deep integration. This is an area in which the union’s bilateral EPAs and DCFTAs have room to grow. The EU should learn from these arrangements as it develops a fresh approach at the continental level.

Many African countries lack technical expertise and experience in deep integration. Therefore, by providing capacity-building in the form of exchanges of experiences and peer learning, the EU can work with these states to develop a joint understanding of how regulatory cooperation would benefit Africa. As African countries have sometimes perceived EPAs as imposing an EU regulatory model, the union will need to focus on cooperation that is useful for Africa (in areas such as cross-border transport, green energy, and digital trade) and capacity-building on various approaches to regulation. This would allow African countries to assess the benefits of adopting international standards, pursuing regulatory equivalence initiatives, and implementing effective certification procedures.

The AfCFTA’s new Services Protocol provides a point of departure for cooperation on these issues – as does the market access schedules the agreement should include by June 2022. The EU could become a uniquely valuable partner for Africa by supporting its shift towards trade and investment in services, and towards the digital economy. For instance, the expansion of services in areas such as energy will be critical to the green transition in Europe and Africa.

The EU can help improve connectivity in Africa by investing in both the soft elements of infrastructure, such as the provision of services and their regulatory underpinnings, and physical infrastructure. And it can engage in cooperation based on capacity-building in areas such as competition policy, intellectual property rights, and digital trade. The EU has a wealth of experience with these issues that can inform and nurture the AfCFTA process. Closer collaboration between Europe and Africa on these topics can help them develop a shared understanding of the regulatory challenges and responses in an increasingly complex global trade regime.

Iza Lejarraga is a trade policy expert with more than 15 years of experience in international organisations, academia, and the private sector. She has worked as a senior economist in leading international organisations, including the Organisation for Economic Co-operation and Development, the African Development Bank, the World Bank, and the Organization of American States.

To read the full commentary by the European Council on Foreign Relations, please click here.

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Many therefore hope that the AfCFTA – by creating a single market of 55 countries with a total population of more than 1.3 billion and a combined GDP of $3.4 trillion – will catalyze industrialization as firms take advantage of economies of scale to spread the risk of investing in smaller markets. To that end, the trade agreement will eliminate tariffs on 90% of goods (the ultimate goal is 97% liberalization).

The AfCFTA will likely boost foreign direct investment across Africa – empirical evidence elsewhere shows that joining a free-trade area could increase it by around a quarter – and shift its emphasis from natural resources toward labor-intensive manufacturing industries. Moreover, the pact has the potential to transform African economies, significantly increase the continent’s share of global trade, and strengthen its bargaining power in international trade negotiations.

But while many have touted the AfCFTA as a game changer for Africa, trade liberalization alone will not necessarily guarantee economic success.

To be sure, the agreement has rightly attracted much attention in academic and policy circles. The World Bank, the International Monetary Fund, the United Nations Conference on Trade and Development, and the African Export–Import Bank have all compiled extensive studies on the AfCFTA’s potential impact. And the Journal of African Trade recently published a special issue on “The AfCFTA and African Trade,” which I co-edited with Andrew Mold of the UN Economic Commission for Africa.

All these analyses point to the agreement’s significant and positive impact on economic development. Specifically, the empirical results according to computable general equilibrium models – which allow for trade-diverting and trade-creating effects of tariffs and non-tariff shocks by exploiting countries’ comparative advantage and price adjustments – are highly encouraging. Aggregate headline estimates derived from these models show that the AfCFTA would increase Africa’s GDP by 0.5% after full implementation in 2045, relative to a scenario without continental trade integration.

Real wages would increase for both skilled and unskilled workers, and especially for the latter, suggesting a shift toward more inclusive growth. The World Bank estimates that the AfCFTA could lift 30 million people out of extreme poverty and around 68 million out of moderate poverty by 2035, with women benefiting more than men. Trade integration could also have a significant impact at the household and corporate level: Combined consumer and business spending is projected to reach $6.7 trillion by 2030.

Trade within Africa is expected to grow strongly under the AfCFTA, with intracontinental exports increasing by 34% (equivalent to around $133 billion annually) compared to a scenario without the agreement. Moreover, around two-thirds of intra-African trade gains will likely be realized in the manufacturing sector – historically the most effective elevator out of poverty. This would set the stage for a welfare-enhancing and mutually reinforcing relationship between intraregional trade and industrialization, resulting in sustainable growth of well-paid manufacturing jobs while broadening countries’ tax bases and improving their external accounts.

But substantial non-tariff barriers, regulatory differences, and divergent sanitary, phytosanitary, and technical standards increase the costs of cross-border trade within Africa by an estimated 14.3%, well above the average tariff of 6.9%. Removing these constraints and deepening the integration of African businesses into global value chains will significantly boost intra-African trade and drive growth. The World Bank estimates that full implementation of the AfCFTA could raise Africa’s real income by 7% (about $450 billion) by 2035, with trade facilitation measures to cut red tape and simplify customs procedures responsible for $292 billion of this increase.

Overcoming Africa’s chronic infrastructure deficit – both physical and digital – will boost the power of trade creation and help to ensure the successful implementation of the AfCFTA. By tackling the continent’s supply-side constraints, policymakers can enhance both production and logistics in a region with more landlocked countries (16) than any other. As investors seek to capitalize on the economies of scale offered by the AfCFTA, integrating markets and improving connectivity must be a top priority.

Clarifying the AfCFTA’s rules of origin – which determine whether products are duty-free under the agreement – also is key to accelerating industrialization and the development of regional value chains. Despite the challenges posed by COVID-19, negotiators have made significant progress on the rules-of-origin agreement, which should be concluded later this year. That will pave the way for phase-two negotiations on key drivers of future growth, including protocols on investment, competition policy, and intellectual-property rights.

But, as the rush to conclude bilateral trade agreements with third-party countries suggests, Africa’s most important trade-integration challenge may be the perennial one of putting the region’s collective interest first. Although the AfCFTA does not bar member countries from entering such negotiations, bilateral deals with third parties could affect African trade patterns and set precedents for regional trade and investment rules. In practice, they could lead to trade deflection, given that the AfCFTA’s most-favored-nation clause automatically extends tariff concessions granted to a third party to AfCFTA members.

As Jeffrey Sachs has argued, “Without a doubt, if Africa becomes economically integrated, it will be a global leader and the largest economic region in the world.” As of this writing, 41 countries have ratified the AfCFTA. But if the pact is to become the launchpad for Africa’s deeper integration into the global economy, governments must complement trade liberalization with robust trade facilitation measures, and strengthen regional coordination in order to engage with external partners as a unified trading bloc.

Hippolyte Fofack is Chief Economist and Director of Research at the African Export-Import Bank (Afreximbank).

To read the full commentary from Project Syndicate, please click here. 

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But preparation and cooperation among African leaders and African Union agencies, particularly the Africa Centers for Disease Control and Prevention, have resulted in many successes – including increased testing capacity, resource mobilization, and coordinated policies to prevent and contain the coronavirus’s spread and promote economic recovery.

Despite these successes, Africa is still facing significant challenges. These include a continued rise in COVID-19 cases, a need for greater testing capacity and improved health infrastructure, difficulties acquiring medical and food supplies, weak social-welfare systems that are struggling to support vulnerable populations during the economic crisis, and high government debt coupled with a need for increased spending.

Although African countries are capable of continuing their progress on the long road to recovery, external support would greatly bolster their efforts. Aside from humanitarian principles and solidarity, a strong and rapid African recovery is in the world’s interest. As long as the virus is unchecked in some regions, no part of the world can be safe from it. Moreover, if COVID-19 further weakens fragile African states or causes health or economic disasters on the continent, a migration crisis or increased threats to international security could ensue.

We therefore propose six ways the world can cooperate with Africa to improve the continent’s crisis response, accelerate its economic recovery, and build momentum for its post-pandemic development.

First, external partners can provide sufficient resources and investment to enable effective COVID-19 responses and inclusive post-pandemic economic recoveries. Although multilateral and bilateral partners have already provided some financial support in the form of debt relief, loans, and grants, African governments need much more. Some estimate the continent’s pandemic-response funding gap at about $100 billion annually over the next three years. Given Africa’s health-care and economic vulnerabilities, additional financial support and debt relief are critical.

Second, partners should support and invest in the African Continental Free Trade Area, which is one of Africa’s best economic-recovery plans. The AfCFTA aims to increase intra-African trade significantly, and thus develop regional value chains, local manufacturing, and sourcing of intermediate and final goods. By reducing the continent’s vulnerability to external shocks through decreased dependence on non-African trade, the agreement will foster economic diversification and resilience, thereby promoting Africa’s integration and assisting its recovery. In addition to backing and investing in the AfCFTA, partners can provide expertise regarding trade regulations and manufacturing capacity.

Supporting private-sector growth is a third way to unlock Africa’s economic potential, representing a significant opportunity – in terms of both trade and investment – that will benefit Africa and global businesses. Although both the formal sector and the large informal sector are currently struggling, owing to lockdowns and economic restrictions, private firms will be crucial to Africa’s recovery and future development. External partners can support African businesses through increased investment, including in small and medium-size enterprises that are today trying to stay afloat and pay their employees. International partners can also help to improve the business environment, for example by overseeing a mandatory regulation process.

Next, external partners can support Africa’s efforts to embrace the Fourth Industrial Revolution (4IR) and achieve a successful digital transformation. During the pandemic, technology has enabled real-time medical forecasting and modeling, better communication between leaders, and the virtual operation of businesses. But Africa’s technology infrastructure, specifically Internet access, lags severely, and the continent has benefited less from digital technology than the rest of the world. Partners can help accelerate the 4IR in Africa by sharing technological innovations, collaborating in adapting them to African contexts, and providing investments that will unleash young African innovators’ technological potential and enable existing innovations to be scaled up.

Fifth, the world can help to ensure that no African is left behind, including through job creation, skill-building, social protection, and gender equality. Vulnerable groups such as those living in urban slums or rural areas, youth, women, and the poorest families need extra government support, but social-welfare systems are weak, especially in fragile states. External partners should therefore give special consideration to assisting the most-affected countries and communities by channeling resources toward these populations, instead of giving unconditional aid to governments, and by collaborating with African leaders to create innovative policies that benefit these groups.

The final priority is to help Africa address its fragilities and bridge the gaps between policy goals and outcomes, including through evidence-based policy research. Ineffective institutions, corruption, and a lack of accountability can undermine even perfect policies. Partners can monitor projects or provide experts to assist in implementation, and can promote good governance through measures and indicators such as Transparency International’s Corruption Perceptions Index, the Fund for Peace’s Fragile States Index, or the World Bank’s Worldwide Governance Indicators. Research institutes and think tanks such as the Brookings Institution are playing an important role in this effort.

Each of these six proposals can help Africa to combat and recover from the COVID-19 pandemic, but they are also critical for realizing the continent’s potential and accelerating its future development. By collaborating with external partners to secure additional resources, develop new initiatives, and invest in key sectors, African countries can mitigate the virus’s immediate impact and hasten economic recovery while building resilient systems for long-term growth and success.

This commentary is co-signed by Joyce Banda, a former president of Malawi; Rosalía Arteaga Serrano, a former president of the Republic of Ecuador; Phumzile Mlambo-Ngcuka, United Nations Under-Secretary-General and Executive Director of UN Women, and a former vice-president of South Africa; Laimdota Straujuma, a former prime minister of Latvia; Yves Leterme, a former prime minister of Belgium; and Rovshan Muradov, Secretary-General of the Nizami Ganjavi International Center.

Landry Signé, a professor and senior director at Arizona State University’s Thunderbird School of Global Management, is a senior fellow at the Brookings Institution, a distinguished fellow at Stanford University, a member of the World Economic Forum’s Regional Action Group for Africa, and the author, most recently, of Unlocking Africa’s Business Potential.

Ameenah Gurib-Fakim, the first female president of Mauritius, is the author of her autobiography, Ameenah Gurib-Fakim: My Journey.

To read the original blog post, click here.

© Project Syndicate – 2020

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President Donald J. Trump’s pursuit of a trade deal with Kenya marks a shift in U.S. policy toward Africa, which has not been a focus of his administration. The move is the latest of Trump’s aggressive pushes for more bilateral trade deals, and officials hope it could help counter growing Chinese influence on the continent.

What’s happening?

Trade talks with Nairobi were announced during a White House visit by Kenyan President Uhuru Kenyatta in early February. It would be the United States’ first free trade agreement (FTA) with a sub-Saharan African country and its second on the continent, after the 2006 FTA with Morocco.

The announcement came shortly before Secretary of State Mike Pompeo’s first visit to the sub-Saharan region, which he used to warn about the risks of Chinese investment.

What would a deal mean for U.S.-Kenya trade?

Trade between the two countries currently stands at around $1 billion annually, just barely putting Kenya in the United States’ top one hundred trading partners. While the United States is a major destination for Kenyan exports, Kenya’s total U.S. trade is dwarfed by that with other partners, especially China, from which it imports more than $3.6 billion worth of goods each year.

It’s unclear how much a new trade pact would move the needle. Kenya already has preferential access to the U.S. market through the African Growth and Opportunity Act (AGOA), a program started in 2000 that eliminates import tariffs on goods from dozens of African countries. Kenya is one of AGOA’s top five exporters to the United States, primarily sending apparel, cocoa, tree nuts, coffee, and tea. It imports American aircraft, machinery, agricultural products, and plastics.

AGOA’s goal is to foster development for its members; in a bilateral trade deal, Washington will likely look for increased benefits for U.S. firms. That could mean increased market access for U.S. farm and manufacturing exports, greater openness to U.S. investment, intellectual property protections, and domestic pro-market reforms.

What’s at stake?

Perhaps foremost among Washington’s concerns is China’s growing influence across Africa. While U.S.-Africa trade has declined since 2008, African trade with China has soared. China is also devoting hundreds of billions of dollars to its Belt and Road Initiative, which comprises infrastructure investments across Africa, Asia, and Europe.

That has included Kenya, with a $4 billion railway between Nairobi and Mombasa that opened in late 2019. The rail project—financed, built, and operated mostly by Chinese firms—raised domestic concerns about a debt trap. China is not the only power deepening its ties to the continent. The European Union has launched a series of EU-Africa summits and is working on trade and investment agreements with most African countries.

Kenya is already a top U.S. foreign aid recipient and major U.S. partner in the region, particularly on counterterrorism, and is among the fastest growing economies in sub-Saharan Africa. After three years in office, the Trump administration has put little effort into bolstering partnerships in Africa, but U.S. Trade Representative Robert Lighthizer has argued for changing that.

For Trump, Kenya is a good candidate for his broader trade philosophy—one based on bilateral deals that he sees as more advantageous for securing concessions—and a deal with Nairobi could serve as a template for the rest of sub-Saharan Africa. Kenyatta, meanwhile, is eager to maintain access to U.S. markets in case AGOA—set to expire in 2025—is not renewed.

At the same time, some observers have cautioned that a bilateral approach could backfire for Africa. They argue that a U.S.-Kenya deal could undermineattempts to build a region-wide economic bloc, the African Continental Free Trade Area (AfCFTA).

To view the full blog, click here.

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Africa’s economies vary considerably in size, levels of economic development and diversification. Without exception they face challenges to create jobs, develop their industrial sectors and diversify their production capacity. This is particularly true for the 32 least developed countries (LDCs) negotiating the AfCFTA.

For many African countries, most of their trade is still with global trading partners. This will not change in the near future and neither will their commodity dependence. This is especially true for the LDCs. While a new trade agreement does not guarantee trade, it does change the incentives to make trade with other partners to that agreement more accessible and attractive. The AfCFTA has the potential to put in place mechanisms to address many of the non-tariff challenges frustrating intra-African trade.

It could do so in a manner which will provide more certainty and predictability and improve the trade facilitation environment. The potential dynamic benefits of the AfCFTA are particularly important. Larger integrated markets may well be more attractive to investors and along with new investment could come new technologies and learning that could boost productive capacity.

It is important to note that the existing regional economic communities (RECs) will not disappear. Intra-Africa trade is highly concentrated within the RECs. More than half of total intra-Africa trade rakes place within the Southern African Customs Union (SACU), and more than 65% takes place within the Southern African Development Community (SADC).

Intra-African trade will continue on multiple tracks. As the AfCFTA advances and becomes more consolidated, there should be more policy convergence, and a simplification of rules across the different trading regimes.At the 12th Extra-Ordinary AU Summit which took place in Niamey, Niger on 7 July, the operational phase of the AfCFTA was launched. By then 27 member states had ratified the agreement, well beyond the 22 ratifications required for the agreement to enter into force.

The statements at this occasion are a reminder that there is still work to be done before goods or services can be traded under the AfCFTA regime. The agreement is being negotiated in two phases. Phase 1 covers trade in goods and trade services disciplines, as well as dispute settlement. Tariff concessions are still to be negotiated among the member states, they have to finalise negotiations on rules of origin, and for trade in services, the specific commitments are also still to be negotiated. Phase 2 will focus on cooperation on investment, competition and intellectual property rights.

For LDCs the matter of tariff concessions is a sensitive one. Despite low levels of intra-Africa trade, tariff revenue is still an important source of government revenue, and the tariff remains an important measure to reduce import competition and so protect domestic industry. The table below summarises the modalities for the negotiation of tariff concessions. Variable geometry is one of the cornerstone principles enshrined in the agreement.

It means that all member states aim to achieve the same level of tariff liberalisation – member states have agreed that 90% of tariff lines are to be liberalised. A distinction is drawn between LDCs and non-LDCs for the tariff negotiations. LDCs have 10 years to achieve 90% liberalisation, while non-LDCs have 5 years. The remaining 10% of tariff lines is divided into two categories. 7% can be designated sensitive products and 3% of tariff lines can be excluded from liberalisation entirely.

LDCs have 13 years to eliminate tariffs on sensitive products and may maintain their current tariffs for the first 5 years, backloading liberalisation during the remaining 8 years. Non-LDCs have 10 years to eliminate tariffs on sensitive products and may also retain the status quo, starting liberalisation in year 6. Both LDCs and non-LDCs may exclude 3% of tariff lines, but the excluded products may not account for more than 10% of their total trade.

There is a further carve-out for a specific group of countries, the so-called G6. They are Ethiopia, Madagascar, Malawi, Sudan, Zambia, Zimbabwe. These countries have argued that they face specific development challenges and have managed to secure a 15-year phase down period. How they will divide the remaining 10% between sensitive and excluded products is still to be determined. Angola and Sao Tome and Principe, which are due to graduate from their LDC status in 2021 and 2024 respectively are not included in the G6 group.

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