Trading under African Continental Free Trade Area (AfCFTA) rules officially commenced on 1 January 2021. The AfCFTA agreement establishes the largest free trade area in the world and offers a glimmer of hope during this pandemic, opening up new prospects for long-term social and economic development on the African continent. What can be done to ensure that the free trade area contributes to social welfare in all the member states? How can international partners support economic integration in Africa? These questions were discussed by African and European experts at the Potsdam Winter Dialogues on 14-15 December 2020. Due to the pandemic, the event was held online.
Economic integration against the backdrop of a pandemic
The coronavirus pandemic has had devastating economic and social impacts on the African continent, as Erastus Mwencha, former Deputy Chair of the African Union Commission and current Chair of the Executive Board of the African Capacity Building Foundation (ACBF), made clear in the opening session. As a result, implementing the AfCFTA, launched on 1 January 2021, has become an even more urgent necessity. The abolition of customs duties and non-tariff barriers to trade is intended to stimulate economic recovery and promote regional value chains.
However, the free trade area seems set to be merely the first step in economic integration. Which social and environmental goals should guide economic integration in Africa, and how can distributional conflicts within society be avoided? These questions sparked lively discussions throughout the event.
Intra-African trade is underdeveloped at present. Several factors prevent African producers from engaging in more cross-border trade.
First, there are the high operating costs. Global corporations are able to absorb these costs, Maria Auma Horne, founder of BLI Global Capital in Kampala and New Hampshire explained, but start-ups and local businesses cannot keep pace. A further example was provided by Samuel Mensah, whose fashion company Kisua works with suppliers from a variety of African countries. If his firm buys fabrics in Ghana, processes them in South Africa and then re-imports them into Ghana as finished goods, the customs duties charged are equivalent to those applicable to garments manufactured entirely in China.
As a representative of a logistics company operating in Africa, Steven Pope, Vice President of GoTrade, Deutsche Post DHL Group, experiences the problems of cross-border trade on a daily basis. In addition to the costs, there is the bureaucratic burden of dealing with customs formalities. The rules are often changed at very short notice. From an macroeconomic perspective, this is devastating, added Trudi Hartzenberg, Executive Director of the Trade Law Centre in Stellenbosch.
Creating equilibrium between African countries
However, there is still a long way to go before the AfCFTA is fully implemented, as many participants emphasised. A particular challenge arises from the enormous differences between the African economies. Therefore, Colette van der Ven, Founder and Director of TULIP Consulting in Geneva, called for transition and support programmes for the benefit of weaker economies; the current exemption rules do not go far enough.
According to David Luke, Coordinator at the African Trade Policy Centre, United Nations Economic Commission for Africa, all countries and sectors will benefit from the AfCFTA, so there is no need for smaller countries to be afraid of trade liberalisation. Regional supply chains will support the advancement of countries with the weakest economies, and the expected prosperity gains will, in all cases, outweigh the loss of customs revenue. Professor Helmut Asche from the University of Mainz was far more sceptical: compensation programmes are needed, he said, to promote the development of competitive production sectors in weaker countries. Without comparable mechanisms, the AfCFTA will solely benefit existing economic champions in Nigeria, South Africa and Algeria.
What might these measures look like? Prudence Sebahizi, Head of the AfCFTA Negotiations Support Unit at the African Union Commission (AUC), drew attention to the planned AfCFTA Facilitation Facility, which will provide compensation for the loss of customs revenue and sectoral decline.
Strengthening social and environmental sustainability
A domestic consensus in support of the AfCFTA is conditional on the avoidance of distributional conflicts within society and the defusing of social tensions. In many countries, workers’ interests in particular have been bypassed and subordinated to achieving progress in intergovernmental negotiations, according to Dr Onohoómhen Ebhohimhen from the Nigerian Labour Congress. The failure to address employment issues is irresponsible: millions of well-qualified young people are jobless and the demographic situation is critical.
Hilma Mote from the International Labour Organization (ILO) endorsed this criticism. Engaging in social dialogue is an urgent necessity as part of AfCFTA implementation. At the same time, trade unions must strengthen their own trade policy expertise in order to narrow the information gap with governments and businesses and facilitate more effective participation. Several attendees underlined civil society’s lack of influence in the shaping of the agreement. The agreement also ignores the key role played by women in agriculture and in informal cross-border trade, Hilma Mote added.
Europe’s controversial role
The participants agreed that constructive international partnerships are needed to master the ecological and social challenges of the economic integration process. The European Union, Africa’s most important trading partner, has a special responsibility in this regard. Its central instrument is the bilateral Economic Partnership Agreements (EPAs) that the EU maintains with numerous African countries and some regional organisations.
Fabio di Stefano from the European Commission’s Directorate-General for International Partnerships defended the usefulness of the EPAs. Although they were not a springboard to the AfCFTA, they did not impede the establishment of the free trade area. David Luke was more critical: in his view, full implementation and expansion of the EPAs would be detrimental to intra-African trade. The question is not whether Africa should deepen trade with Europe, but how and when it should do so. However, implementing the African free trade area should be the priority.
A welcome form of support that the European partners could provide is assistance with the financing of digital business models in Africa, said Jamie MacLeod from the United Nations Economic Commission for Africa. There are countless young entrepreneurs who have very promising ideas and would like to start a digital services business. The stumbling block is the lack of access to finance; the European partners could provide valuable assistance here.
Time for a new paradigm
In order to move closer to the UN Sustainable Development Goals through free trade, Rob Davies, , a former South African trade minister, recommended the paradigm of development-oriented integration. It is also important to learn from the past, for example by recognising that industrialisation has a key role to play. Today, however, industrialisation must be guided by very different priorities that take account of the challenges posed by megatrends such as climate change and digitalisation. Trudi Hartzenberg welcomed the fact that the AfCFTA is not a separate entity but dovetails with a range of complementary measures that form part of the AU’s Agenda 2063, such as the African Digital Transformation Strategy. This is where it differs from previous integration programmes..
As the contributions to the Potsdam Winter Dialogues repeatedly showed, three elements are required. First, there must a political commitment on the part of decision-makers not only to drive this very ambitious project forward but also to flank it with community instruments aimed at achieving a fair balance of interests. Second, there must be a willingness on the part of the societies concerned to engage with each other and address distributional conflicts in a constructive manner. And third, a far-sighted and coherent approach is required from international partners, especially in Europe, in order to give the many young entrepreneurs in Africa genuine opportunities.
For more detailed report and further materials on the Potsdam Winter Talks 2020 see: https://www.sef-bonn.org/en/events/potsdam-spring-dialogues/2020.html