AfCFTA: A new dawn for African trade or just another false start?

The acronym, AfCFTA,  does not trip easily off the tongue but in times to come, you may be encountering it as frequently and as pervasively as the EU, NAFTA, SADC and other terms designating regional trade blocs. The difference will be that AfCTA will refer to the largest free-trade region in the world by participating countries, namely the continent of Africa. It will also cover a market of 1.3 billion people with a combined gross domestic product of more than USD3.4 trillion.

AfCFTA refers either to the African Continental Free Trade Agreement or the African Continental Free Trade Area created by the Agreement. At the beginning of this year, the AfCFT Agreement came into force and trade under its auspices in the AfCFTArea theoretically began, although there is still much to do and to be decided before the Agreement can be fully implemented.   Herein we briefly consider the features of the Agreement as well as the implications it will have on those who invest in Africa.

Background of the AfCFTA

Before this can be done however it is necessary to outline some of the background to this historic accord.
The origins of the AfCFTA can be traced as far back as 1963 when a group of independent African countries formed the Organisation of African Unity (the OAU) to promote intra-continental co-operation. In 1980, the OAU adopted a resolution to minimise the continent’s reliance upon the West by promoting trade between African states.

Following decades of false starts to this initiative, the African Union (AU), the successor to the OAU, finally agreed at its 2012 summit held in Ethiopia to create a continent-wide free trade area by 2017. It was only however in 2018 that an agreement to govern such an area was ultimately reached and signed by 54 of the AU’s 55 member countries (with war-torn Eritrea as the lone outlier).

After further delays, some of which related to the COVID-19 pandemic, this agreement was eventually launched on 1 January 2021 although many of its provisions are still to be fully implemented.

Objectives

Briefly, the main objectives of the AfCFTA, according to its founding texts, include:

  • creating a single market for the duty -free movement of goods and services;
  • supporting economic integration of Africa (which historically has seen low levels of intra-continental trade);
  • aiding in the free movement of persons and capital;
  • facilitating external investment;
  • promoting industrial development;
  • achieving sustainable and inclusive socio-economic growth;
  • enhancing the competitiveness of member states in the global market; and
  • resolving the challenge posed by multiple memberships in overlapping regional trade blocs (like the Southern African Development Community or SADC).

Practical steps to be taken

As one of the measures to attain these lofty goals, the Agreement requires signatories to commit to a phased reduction of tariff barriers. Ultimately, it envisages that 97% of customs duties between member countries will be entirely eliminated.90% of goods are, in terms of the agreement, to have their tariffs reduced to zero within five to ten years (depending on the member state’s level of economic development) and thereafter, 7% over slightly longer periods. The remaining 3% may still carry a protective duty rate.

Aside from tariff reductions, the Agreement also establishes committees that will facilitate the removal of non-tariff barriers to trade, such as the time it takes for goods to clear customs.
Groundwork is also to be laid for a continental customs union that will regulate trade with non-members.

Africa has sub-par infrastructure, such as poorly maintained road and rail links. It has excessive bureaucracy in many countries, incessant wars and numerous corrupt and unstable governments. All of this frustrates trade and none of this will be disappearing overnight regardless of how many agreements are signed between officials. Add to this toxic mix, the devastation the COVID-19 pandemic has wrought on Africa’s nascent economies and the AfCFTA may be stillborn.

Only time will tell. In the meanwhile, importers into and exporters to African countries may be flummoxed with the new layer of regulations and will need advice to navigate through the additional complexity. You are welcome to contact us for advice about both the opportunities and threats AfCFTA represents for your business.

Current Status

While the Agreement technically kicked off at the beginning of this year, the steps proposed above will nevertheless take some time before AfCFTA can properly be implemented.

For one, AfCFTA must still be ratified by its signatories for it to become law. As at 31 December 2020, ratification has only happened in 34 of the 55 countries that signed the agreement.

As for the reduction in tariffs, schedules detailing the actual duties to be phased down for each member country have not yet been released and are, in fact, still to be finalised.

Furthermore, the so-called “rules of origin” remain incomplete at the time of writing. These rules define the percentage of inputs that have to be sourced regionally to qualify goods for duty-free treatment. Tariffs on African products, obviously, cannot be reduced until there is agreement on what constitutes an “African product”.

More clarity is also still needed on how the provisions of AfCFTA will interact with existing regional agreements such as SADC. Each of these agreements has their own duty rates and rules of origin so it will be a complex process for exporters and importers to determine under which agreements they qualify and which they wish to be applied.

Implications for business

Once implemented, AfCFTA could have a dramatic impact on market conditions for trading within Africa.
Manufacturers that were prevented from exporting their products due to prohibitive trade barriers may now have opportunities to sell their products to previously untapped markets on the continent.

Conversely, other manufacturers and importers may face threats from neighbouring countries where the same goods can be produced more cheaply. According to international organisations such as the World Bank and the United Nations Economic Commission for Africa however, the AfCFTA, if it succeeds, may increase intra-African trade by over 50% and ultimately increase continental income by some $76 billion, lifting millions out of poverty.

A word of caution

While this all seems rosy and exciting, it should be borne in mind that even once AfCFTA gets off the ground, there will be considerable obstacles to its success.

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How can we help?

How you structure your business is a critical question as you expand globally.  The right structure will protect your assets, improve your currency position, support your business operations, facilitate future business expansion and changes, and optimise your overall tax rate. Trying to unscramble a sub-optimal structure entered into in haste or without full consideration of relevant facts is complex and expensive, so it’s important to plan upfront.

Structuring an international business is both a science and an art – this is our specialist area of expertise. Regan van Rooy is an international tax and structuring advisory firm focussing on Africa. We have offices in South Africa, Mauritius and Ireland and we can help you with any international tax or structuring query.

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