AfCTFA: The basics – what you need to know

Hogan Lovells
Contact

Hogan Lovells

[author: Ala Peter-Daley]*

The African Continental Free Trade Area (AfCFTA) will be the world’s largest free trade area since the formation of the World Trade Organization. It aims to bring together all 55 member states of the African Union (AU) covering a market of more than 1.2 billion people, including a growing middle class and a combined gross domestic product (GDP) of $2.6 trillion. Estimates from the Economic Commission for Africa (UNECA) suggest that the AfCFTA has the potential to boost intra-African trade by 52.3 percent, and to double this trade if non-tariff barriers are also reduced.

What is it?

AfCFTA has eight strategic objectives: (1) creating a single market for goods and services, facilitated by the movement of people; (2) contributing to the movement of capital and people and facilitating investment; (3) creating a continental customs union; (4) expanding intra-African trade; (5) resolving the challenges of overlapping memberships in regional economic arrangements; (6) promoting sustainable and inclusive economic development; (7) boosting industrial development; and (8) enhancing competitiveness.

In March 2018, three separate agreements were signed: the African Continental Free Trade Agreement; the Kigali Declaration; and the Protocol on Free Movement of Persons. The three agreements work with the aim of reducing bureaucracy, harmonising regulations and avoiding protectionism. It will also expand intra-African trade through better harmonisation and co ordination of rules across Africa. Also of significant interest are the so-called ‘Phase II’ protocols, still currently being negotiated, which will include the investment protocol that will decide the important question of how intra-African investments are protected, whether intra-African investors will be able to start an investor-state dispute on the basis of the protections contained in the treaty, and if they can, in what forum.

The economic impact

Intra-Africa trade has historically been low. Intra-African exports were 16.6% of total exports in 2017, compared with 68% in Europe and 59% in Asia. By removing trade barriers and allowing the free movement of goods, services, and people across Africa, it is estimated that AfCFTA could help to increase combined consumer and business spending on the continent to $6.7 trillion by 2030.

AfCFTA is also expected to enhance competitiveness for African companies at the industry and company level through exploiting scales of production, providing continental market access and enabling a better allocation of resources across the continent. With global trade rules being eroded in other regions, China and the United States spiralling into a trade war and protectionism becoming more prevalent in many countries, AfCFTA will allow Africa to create a trade buffer for itself. With all countries united in one giant bargaining unit, it will also hold far more sway on the international stage.

Not all plain sailing

There are challenges to the implementation of AfCFTA. Several regional economic integration arrangements already exist; two examples include the Southern African Customs Union (SACU) and the East African Community (EAC), which are among the most successful regional arrangements on the continent. There are currently over 15 regional integration arrangements across Africa and whilst these arrangements have contributed to a significant expansion of intra African trade, according to the IMF, these have delivered less trade benefits than were originally envisaged.

Significant aspects of AfCFTA still need to be negotiated, and there are vast differences in each countries’ economic weight and priorities. Nigeria, Egypt and South Africa account for over 50% of Africa’s cumulative GDP, while its six sovereign island nations represent about 1%. This has been a complicating factor in negotiations. Economists have also highlighted the challenges to AfCFTA’s success, including; poor road and rail links, large areas of unrest and violent conflicts, excessive border bureaucracy and corruption that continue to hold back growth and integration across the region.

Integration efforts

The EU has helped develop a computerised platform for AU countries to register goods on which they are willing to reduce or eliminate tariffs under the free-trade regime. AU representatives also visited the European Food Safety Authority in Parma, Italy to quiz experts on how to set up an equivalent body in Africa. These steps are in addition to the creation of the Pan African Payment and Settlement System (PAPSS), a continent-wide digital payment system aiming to facilitate payments for goods and services in African currencies and save the continent more than $5 billion in payment transaction costs per annum. PAPSS was formally launched by the African Export-Import Bank (Afreximbank) in July 2019.

COVID-19

The African economy was set to grow at about 3.4% in 2019 and projected to increase to 3.9% in 2020, but COVID-19 has had a negative impact on these projections. Over 53% of Africa’s exports go to countries, particularly Europe, that are also suffering from the pandemic. This has subdued export activity in Africa. The services sector has also been hit and is set to fall by between 20% and 30% this year, with travel and hospitality expected to be worst hit. As a result the original deadline for trading under AfCFTA was pushed back from 1 July 2020 to January 2021.

Investor confidence

AfCFTA is an agreement for a single market which will span Egypt to South Africa, Senegal to Djibouti, encompassing 1.2 billion people with a combined GDP of $2.6 trillion. Africa has a young population and a growing middle class whose purchasing power is increasing. Investors will be able to do business on a single set of trade and investment rules across the African continent. Investors will also be able to take advantage of economies of scale and avoid the challenges of market fragmentation. Whilst COVID-19 has had a significant impact on the economic fortunes of the AU, the fact that economic integration is progressing under AfCFTA, and international organisations are providing support, will likely fuel investor confidence in the long term prospects of the region.

Sources

https://www.tralac.org/resources/our-resources/6730-continental-free-trade-area-cfta.html

https://www.tralac.org/documents/resources/faqs/3079-african-continental-free-trade-area-faqs-december-2019-update/file.html

https://www.tralac.org/documents/resources/booklets/3028-afcfta-a-tralac-guide-6th-edition-november-2019/file.html

https://www.tralac.org/publications/article/13997-african-continental-free-trade-area-a-tralac-guide.html

https://www.tralac.org/documents/resources/cfta/1963-agreement-establishing-the-afcfta-consolidated-text-signed-21-march-2018/file.html

https://www.tralac.org/documents/resources/cfta/3176-au-assembly-decision-on-the-afcfta-february-2020/file.html

https://www.weforum.org/agenda/2019/09/africa-just-launched-the-world-s-largest-free-trade-area/

https://www.weforum.org/agenda/2019/07/africas-free-trade-zone-economic-boom

https://www.gtreview.com/news/africa/africas-continent-wide-payment-and-settlement-system-launched/

https://www.tralac.org/documents/events/tralac/2742-tralac-brief-payments-services-march-2019/file.html

https://www.afreximbank.com/afreximbank-announces-1-billion-adjustment-facility-other-afcfta-support-measures-as-african-leaders-meet/

https://www.imf.org/en/Publications/Staff-Discussion-Notes/Issues/2020/05/13/The-African-Continental-Free-Trade-Area-Potential-Economic-Impact-and-Challenges-46235

https://ec.europa.eu/taxation_customs/business/calculation-customs-duties/rules-origin/general-aspects-preferential-origin/arrangements-list/generalised-system-preferences/the_registered_exporter_system_en

https://www.un.org/africarenewal/magazine/may-2020/coronavirus/implementing-africa%E2%80%99s-free-trade-pact-best-stimulus-post-covid-19-economies

*Trainee Solicitor

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Hogan Lovells | Attorney Advertising

Written by:

Hogan Lovells
Contact
more
less

Hogan Lovells on:

Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
- hide
- hide

This website uses cookies to improve user experience, track anonymous site usage, store authorization tokens and permit sharing on social media networks. By continuing to browse this website you accept the use of cookies. Click here to read more about how we use cookies.