The AfCFTA is an initiative rooted in the AU’s Agenda 2063, and the main objective of the AU is to create a single continental market for goods and services with free movement of people and investments. In doing so, intra-African trade will invariably be expanded across the continent, thereby increasing competitiveness and supporting economic transformation on the African continent.
The aim of the AfCFTA is to ultimately reduce and eventually eliminate customs duties and non-tariff barriers on goods and allow free provision of services in priority sectors.
Unfortunately, the launch of the African free trade zone has been moved to a tentative date in January 2021 over Covid-19 pandemic lockdowns across 42 out of 55 countries in the continent.
In case of conflict of protocols under the AfCFTA agreement “State Parties 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”, which means that existing Regional Economic Communities (RECs) will be maintained.
In every crisis there is an opportunity and the decision to delay the launch may allow unprepared local companies to re-jig export processes and maximise gains when the Africa market becomes conducive. Currently, trade is practically impossible due to containment measures from African countries. Intra-African trade is marred by traffic at the borders as trucks scramble to deliver essential goods, and inward-looking policies as each country seeks for ways of saving lives and the economy.
Current status of the AfCFTA and brief insights
To date, a total of 54 of the 55 AU Member States have signed the AfCFTA, while a total of 30 countries or 54.5 percent of AU Member states (including South Africa) have ratified the agreement which means that that the Agreement is effective in these countries and that all rights, provisions and obligations apply.
The AfCFTA frameworks covers various aspects including Trade in Goods and Services, Investment, Intellectual Property Rights and Competition policy. Trade in Goods and Services are being negotiated during the first phase and there are negotiations on a number of issues that are still ongoing. Phase 2 of the negotiations will cover investment, property rights and competition policy and are expected to be finalised by January 2021. Specifically, there are ongoing negations with rules of origin for goods and schedules of specific commitments for services.
Ideally, the aim was to finalise negotiations on tariffs concessions on goods trade and commitment on trade in services and rules of origin, so that trade under the AfCFTA can begin on the 1st of July 2020. However, this looked increasingly unlikely, given the Covid-19 pandemic. Resultantly, the implementation of the AfCFTA on July 1 may be delayed by the AU for up to seven months due to the Covid-19 pandemic.
Prospects/benefits to local companies and especially the Metals and Engineering (M&E) industry
The idea behind this free-trade agreement is to bring down trade barriers and establish an African single market and customs union. The prospects/benefits for local companies include:
- Large market size
Africa has a population and GDP roughly the size of India but is divided into 55 AU Member States. Many African countries are too small to attract the necessary investment for industrial growth. Businesses also face on average tariffs of roughly 6.9 percent when they trade across the 107 unique land borders. Moreover, many businesses have to deal with substantial non-tariff barriers, regulatory differences and divergent technical standards which increase trade costs by an estimated 14.3 percent. The AfCFTA therefore aims to consolidate and integrate the African continent into a single market with an estimated GDP of US$3 trillion.
- Economies of scale in manufacturing
The central idea around the AfCTA is to reduce and eventually eliminate barriers to trade to enable companies across Africa to trade in a single market. In reducing the costs involved with trading, local manufacturing companies will be able to increase production, leading to economies of scale. Multinational exporting companies will also be able to streamline the movement of inventory between branches across the continent.
- Potentially boost manufacturing investment and exports to serve a single African market
Despite housing nearly 17 percent of the global population, Africa accounts for only 2.8 percent of global investment stock. For any investors to qualify for the benefits and preferences under the agreement, they must ensure that production involves sufficient transformation or value-addition in an AfCFTA Member State.
As a result, exporting M&E businesses also stand to benefit from the agreement by linking up with African businesses and contributing towards inputs, intermediate goods and supportive services.
- Cost competitiveness and diversification
The combination of a single African market, cost competitiveness and its growing working-age population makes Africa potentially a compelling destination for multinational companies looking to diversify away from China-centric global value chains. Local companies and especially those of the M&E sector should be part of these new developments and not score own goals.
Manufacturers pulling out of China are considering Africa to diversify their supply chain. With the advent of the AfCFTA, it is estimated that Africa’s GDP will grow at a rapid pace, from an estimated US$3 trillion in 2020 to as much as $16 trillion by 2060. This presents huge market opportunities for local companies.
By decreasing the cost of trade and the facilitation of business expansion, the AfCFTA provides opportunities whereby businesses will not only gain from, but also contribute to Africa’s significant market growth.
- Increase in exports volume
In bringing down trade barriers, the agreement has the potential to increase manufacturing exports. It is estimated that industrial exports in Africa will benefit the most from the AfCFTA and will invariably contribute to the industrialisation of the continent. Local companies should ensure that they are part of this by proactively getting ready, if not already exporting. Moreover, the AfCFTA is forecast to boost intra-African industrial products exports by between 25 percent and 30 percent, which translates to a monetary increase of between US$36 billion and US$43 billion.
Once trade begins under the AfCFTA, it means that tariffs on 90 percent of goods traded will be reduced in equal annual installments until they are eliminated within a period of 5 years for countries that are not classified as Least Developed Countries (LDCs) and withing 10 years for LDCs.
Example: If a product faces a tariff of 25 percent when imported into a non-LCD, it means that once trade begins under the AfCFTA (currently 1 July 2020), the tariff would be set at 20 percent from July 2020 and 15 percent from July 2021 etc. until the product is traded duty-free.
- Companies have the opportunity to improve margins and sustainability and expand their international footprints
Companies must ensure that their products are competitive in the foreign market, minimise international trade challenges and avoid pitfalls that arise when dealing in foreign markets.
SEIFSA provides comprehensive, generic, up-to-date courses on export development for local companies looking at either venturing into the rest of Africa or overseas, consolidating their positions or increasing their exports market share