Long-awaited Africa-wide free trade zone opens on January 1st

The AU summit had made a push for those countries not yet ready to trade on January 1 ‘to get on the bus’. The summit had decided these countries should ratify the AfCFTA and submit their tariff offers by June 30 2021.

Many of Africa’s most important economies will start duty-free trading of goods among themselves on January 1 when the eagerly awaited Africa Continental Free Trade Agreement (AfCFTA)  goes into operation.

South Africa’s Trade, Industry and Competition Minister Ebrahim Patel believes the agreement will be an important incentive for foreign investors to locate their manufacturing plants in Africa because it will provide them with a much larger market – of up to 1.4 billion people – than those of any of Africa’s 54 individual states.

He told Daily Maverick he expected that apart from South Africa, most of Africa’s other large countries would be among the first economies which opened their markets to each other on that historic day.

The preparations for “commercially meaningful” free trading to start on January 1 under the AfCFTA were finalised at a virtual African Union (AU) summit held on Saturday and chaired by President Cyril Ramaphosa, this year’s AU chairperson. He told the summit the AfCFTA would boost intra-African trade, promote industrialisation and competitiveness and contribute to job creation, and it would unleash regional value chains that would facilitate Africa’s meaningful integration into the global economy. The AfCFTA will also improve the prospects of Africa as an attractive investment destination.

It would also help advance the empowerment and freedom of Africa’s women, by improving their access to trade opportunities. He urged other leaders to give special and adequate support to female-owned businesses.

The AU had originally planned to begin AfCFTA trading on July 1 this year, but the Covid-19 lockdowns intervened and the necessary negotiations were suspended. The new deadline of January 1 2021 was set. Meanwhile, the AfCFTA Secretariat – headed by South African Wamkele Mene – created a special secure online platform on which countries negotiated their tariff concessions and the all-important rules of origin.

Enough of these negotiations have now been completed to enable some trading to start on January 1, Patel explained. He said trade could start in those products for which African states had already agreed the rules of origin and by those countries that had ratified the AfCFTA and had also submitted tariff drawdown offers. The treaty obliges participating states to remove tariffs on at least 90% of their imports from other AfCFTA states.

Patel said that the member states had also aligned their customs procedures and agreed on the rules of origin for about 81% of total tariff lines at or just before the summit so trading could start in those products on January 1.

So far, all of Africa’s states except Eritrea had signed the AfCFTA and 34 have ratified it.

However, before Saturday’s summit, only 10 countries had both ratified the AfCFTA and submitted tariffs offers. These were Chad, Republic of Congo, Egypt, Equatorial Guinea, Eswatini, Gabon, Mauritius, Namibia, Sao Tome and Principe, and South Africa, according to Niger President Issoufou Mahamadou, who is the AU’s leader and champion of the AfCFTA process.

But this number seems to be increasing fast. Patel said he believed the summit had created momentum for other large economies to get on board in time for the January 1 start or soon after. Other countries would join later.

And that means the countries with the largest economies have all ratified the agreement: Egypt, South Africa, Nigeria, Ghana, and so on.

Nigeria, Africa’s largest economy, had originally been one of most reluctant of the African countries to join the AfCFTA, but as Patel and others noted, it informed the AU on the morning of the summit, that it had ratified the treaty.

“And that means the countries with the largest economies have all ratified the agreement: Egypt, South Africa, Nigeria, Ghana, and so on.”

Patel said he believed that another major African economy, Morocco, which had not yet ratified the AfCFTA, would do so quickly now that everything was set for trading to start on January 1.

And he believed that countries like Nigeria would also now submit their tariff offers soon.

“I think Nigeria has sped up all of their processes. They see this as quite important as does Egypt and South Africa. But also the east African players, Kenya, Uganda, Rwanda, are all keenly anticipating the start of trading. And of course Morocco has been very active, as has Algeria in identifying opportunities. So it’s across the continent. Ghana is very strong in seeing the opportunities through.

“So a lot of countries have been waiting for us to finalise the rules of origin. We, as trade ministers, submitted the rules of origin for 81% of tariff lines yesterday [Saturday] to the Assembly and it was endorsed. So now that it has been supported and approved I think countries are going to find it easier to come forward with their tariff offers.

“Most of the large players have made their tariffs offers. For example, South Africa has done it.

“We still need Botswana to ratify,” Patel said, because Botswana, along with Lesotho, Namibia, Eswatini and South Africa, are the members of the Southern African Customs Union (SACU), which has no internal tariff borders and will have to put in a common tariff offer.

“So, all the [other] SACU members have ratified and we’ve put in a SACU offer.

“We just need Botswana to dot the i’s and cross the t’s, which they’ve advised they’re in the process of doing. They don’t need parliamentary ratification, so it’s for the executive to finalise. A few of the other customs unions are in the same position. We’ve received an offer from Ecowas [the Economic Community of West African States] and from the East African Community. So, basically all the customs unions have now put an offer in.

“A number of countries have said, ‘Our ratification is dependent upon seeing whether the union can pull off all the other elements, the legal framework.’ So, they were active in the discussions in the summit, as was Algeria, which is also in the process of ratification.

You need other things also. You need to ensure you’ve got your logistic systems in place. That you enable a smooth flow of goods. Those kinds of things. But the starting point is that you have a legal framework in place that enables a market that is big enough for investors to want to start their own plants somewhere on the continent instead of selling from Asia or Europe or the Americas.

“So they want to see, is this going somewhere or will such a large bloc of countries be able to pull off something like this? I think they are now convinced they can do it. Of course there will be hiccups and challenges. But at least the legal framework has now been analysed and all the critical steps that were required to be put in place have been completed.

“In the case of Europe, it took many decades to get to the point where you had 27 countries that are part of a single trading bloc. So there will be additional countries that will join after the start of trading. One of the areas we have agreed to is that we don’t close the door on the first of January. Countries are still entitled to submit offers [of tariff concessions] right up to the end of June.

“This is a very significant thing, because if you think about it the African continent has 17% of the world’s population and only 3% of global GDP. And one of the big constraints to upping the output has been the small size of local markets. And a free trade area creates the beginnings of the legal framework for economies of scale.

“You need other things also. You need to ensure you’ve got your logistic systems in place. That you enable a smooth flow of goods. Those kinds of things. But the starting point is that you have a legal framework in place that enables a market that is big enough for investors to want to start their own plants somewhere on the continent instead of selling from Asia or Europe or the Americas.

“And when I addressed investors at the recent investment conference [in South Africa] one of the most commented on developments was the AfCFTA. And a number of investors said, ‘If you can ensure it’s introduced on time, it does change our investment calculus, it does change whether it’s viable or not to produce on the continent. For 55 separate countries it’s just not possible to put up plants. But for a market that is potentially over a billion consumers, it makes a lot of sense.’”

Patel said the summit had made a push for those countries not yet ready to trade on January 1 “to get on the bus”. The summit had decided these countries should ratify the AfCFTA and submit their tariff offers by June 30 2021. They also set that as the deadline for finalising the negotiations on the rules of origin for the remaining 19% of tariff lines so that trading could start in these products too.

Rules of origin are critical in any free trade agreement because they define how much of a specific product must be manufactured within the free trade area for it to qualify for tariff-free movement within the area. So, for example, a very lenient rule of origin might stipulate that shirts imported into the AfCFTA would qualify as AfCFTA products if only the buttons were sewn on inside the AfCFA. A much stricter rule of origin would insist that not only must the whole shirt be made within the AfCFTA area but the cloth must also be woven inside the AfCFTA.

The summit also agreed to set June 30 2021 as the deadline for countries to submit their offers for liberalising trade in five key areas of services – business services, communications, finance, tourism and transport. The leaders also agreed to give member states until December 31 2021 to submit their offers in the remaining seven service sectors and to give priority to liberalising the health and education service sectors because of the demands on these created by the Covid-19 pandemic.