- The African Continental Free Trade Area (AfCFTA) is now widely touted as the African Union’s (AU) most audacious project.
- Two years after its inauguration in January 2021, 54 of 55 nations have signed the AfCFTA, and 46 have presented their instruments of ratification with the AU Commission.
- The AfCFTA aims to boost Africa’s exports and welfare with its operational instruments.
The African Continental Free Trade Area (AfCFTA) is now widely touted as the African Union’s (AU) most audacious project. The framework ties together the most significant number of member countries of any trade agreement since the World Trade Organisation (WTO) in 1995.
The AfCFTA had become topical even before its formal launch. Members of the business community eagerly awaited the full implementation of the AfCFTA. But two years since its formal launch, how far has the AfCFTA ushered in the ‘new era’ of African integration it promised?
Status of the AfCFTA
Two years after its inauguration in January 2021, 54 of 55 nations have signed the AfCFTA, and 46 have presented their instruments of ratification with the AU Commission. This means that more than 80 per cent of the ‘State Parties’ should execute the agreement.
AfCFTA members’ trade is yet to begin. The agreement must be fulfilled completely. The AfCFTA Secretariat in Accra has assisted signatories in carrying out the agreement while concluding the first two phases.
The AfCFTA negotiations were divided into two phases. Phase I of the agreement focused on intra-African trade liberalisation and dispute settlement. Phase II Protocol covers investment, intellectual property rights, competition, e-commerce, and women and youth. These protocols, as well as the framework agreement, constitute legal instruments under the AfCFTA.
Although Phase I protocols have been adopted by State Parties, negotiations on rules of origin and tariff schedules are still ongoing. Phase II saw the adoption of Intellectual Property, Competition, and Investment Protocols. The E-Commerce Protocol and the Women and Youth Protocol remain under negotiation.
On the AfCFTA front, significant advancements have aided the agreement’s implementation. Examples include the Pan-African Payments and Settlements System (PAPSS), the AfCFTA Adjustment Fund, the Automotive Fund, the E-Tariff Book, the NTB Online Monitoring Mechanism, and the Guided Trade Initiative. Investors must watch these instruments if they wish to capitalise on AfCFTA opportunities.
Also Read: How AfCFTA can turbocharge African economies
The AfCFTA Guided Trade Initiative
Only a few countries have officially traded under AfCFTA. Ghana has received automobiles, truck batteries, and tea from Kenya. Rwanda has shipped finished coffee to Ghana. Under this new regime, Ethiopian Airlines, DHL, and the African Electronic Trade Group (South Africa, Ghana, Ethiopia, Guinea, and Eswatini) have traded. However, intra-African trade remains low under the AfCFTA.
The Guided Trade Initiative (GTI) was launched in October 2022 to assess the operational, institutional, legal, and trade policy framework for commercially significant trading under the AfCFTA. The initiative connects businesses and items for trade. There are 96 items specified.
The GTI removes a significant hurdle in the private sector. It assists them in locating AfCFTA-compliant products. Cameroon, Egypt, Ghana, Kenya, Mauritius, Rwanda, Tanzania, and Tunisia lead GTIis led by Cameroon, Egypt, Ghana, Kenya, Mauritius, Rwanda, Tanzania, and Tunisia. If the initiative is successful, more States Parties may join.
Pan-African Payments and Settlements System (PAPSS)
The AfCFTA Secretariat and Afreximbank formed PAPSS to stimulate commerce by providing a coordinated intra-African payment and settlement mechanism. The electronic payment system enables traders to send cross-border payments in local currency. It allows countries to transact in their respective currencies.
Instant payments should enhance African firms’ trust and trade. Moreover, the system addresses legal and operational concerns with cross-border payments. Despite its introduction and successful trials in eight countries, the payment system has yet to gain widespread acceptance.
According to Afreximbank, PAPSS should save Africa at least $5 billion in transfer and settlement fees. All central banks of State Parties should sign up by 2024, followed by all commercial banks a year later. PAPSS will collaborate with other regional and continental cross-border payment systems beyond Africa through investment, trade, and investment. This opens up opportunities for investment in the banking sector and fintech ventures throughout Africa.
The Rules of Origin Manual and E-Tariff Book
The Rules of Origin (RoO) Manual governs AfCFTA products’ origin determination. The certificate of origin reduces tariff rates for exporters, benefiting investors. Traders need the RoO certificate to prove the products’ origin and qualify for special tariff treatment or lower import taxes in ACFTA nations.
For instance, the Kenya Revenue Authority (KRA) has streamlined RoO certificate applications to one working day in Kenya. The exporter must submit an application form with the product’s Harmonized System (HS) code and destination. The RoO certificate indicates this code, validated against the AfCFTA HS list. The receiving country’s customs officers use the RoO certificate to clear the goods.
The national body usually charges a nominal cost, and KRA inspects the property before issuing the certificate in Kenya. After receiving the AfCFTA RoO certificate, the exporter may sell the item at the concessional rate. The RoO handbook assures investors that African-made products will fulfill AfCFTA rules of origin and circulate freely throughout the continent.
The E-Tariff Book lists AfCFTA tariff commitments with approved and published schedules. State Parties to the AfCFTA have agreed to eliminate tariffs on 97 of tariff lines over some time while excluding 3 per cent. Over five years in developing nations and ten years in LDCs, tariffs will be reduced from 97 per cent of products.
Meanwhile, 7 per cent of tariff lines are sensitive items. Long-term reduction and elimination will occur. Developing nations will remove tariffs in 10 years, whereas LDCs will do it in 13 years. Tariffs will decline slowly for manufacturers in one African country exporting to another.
For instance, a developing African nation that imported a 90 per cent product in 2020 and paid a 30 per cent tax would only be charged 25 per cent in 2021 and 20 per cent in 2022 until the tariff reaches zero in 2026. This will help firms understand and monitor global and intra-African trade trends. In practice, enterprises will know AfCFTA export prospects, destination tariffs, and import rivalry.
AfCFTA Non-Tariff Barrier (NTB) Online Monitoring Mechanism
Regulatory and procedural restrictions like tariffs and customs charges hamper intra-African trade. NTBs impede commodities flow and cost importers and exporters billions of dollars yearly due to high compliance costs, confusing rules of origin, extensive paperwork requirements, difficult packaging regulations, and long border processes.
Thus, NTBs hurt intra-African trade. Cutting red tape and streamlining customs will boost revenue. UNCTAD predicts that African nations earn $20 billion annually by abolishing continental NTBs, compared to $3.6 billion by reducing tariffs. The AfCFTA may increase intra-African trade by 52 per cent by removing import taxes and double trade by reducing NTBs, according to UNECA. The AU created the AfCFTA NTB Online Monitoring Mechanism to address this issue.
A dedicated website debuted this method in 2019 and became active in 2020. The program detects, reports, and tracks NTBs. Any party, even the business sector, may complain. The tool is working, and parties file complaints. Due to minimal AfCFTA trade, the mechanism’s efficacy is not extensively examined. The mechanism’s accessibility and ease of complaint processing will prove crucial when all nations start trading. As of March 2023, six complaints were filed, and one settled. This tool remains essential for corporate complaint filing. It might become an alternate dispute resolution tool for firms under the agreement.
The AfCFTA Adjustment Facility Fund
The Afreximbank has funded a $5 billion fund to help AfCFTA members adapt to the trade agreement’s short- and medium-term budgetary impacts. The AfCFTA Adjustment Facility Fund provides funding, technical support, compensation, and grants via a base fund, general fund, and credit fund. Experts project that the Fund will need $10 billion. Since its March 2023 lunch, all funds have yet to be released. However, Afreximbank has invested over $1.7 billion in regional value chains to drive industrialisation and reduce supply-side limitations that have hampered African trade.
The AfCFTA Private-Sector Engagement Strategy
The AfCFTA Private-Sector Engagement Strategy guides the Secretariat’s collaboration with the business sector and other stakeholders to increase intra-African trade and production. The engagement strategy was developed after comprehensive talks with key value chain industry actors and organisations, development finance institutions, and AU agencies. The strategy allows the corporate sector to actively interact with the secretariat to identify AfCFTA’s potential and benefits.
The strategy identified five high-investment sectors: automotive, agricultural and agro-processing, pharmaceuticals, transport, and logistics. These were chosen for their ability to fulfill African needs via local production and export value. These five industries import $130 billion in products and services.
The engagement strategy helps companies understand the AfCFTA’s objectives and enhance trade. Businesses need knowledge beyond negotiations and policy issues throughout the execution of this strategy. It also allows business groups with technical competence to create tools for enterprises to comprehend the ramifications and new market prospects better.
The AfCFTA Dispute Settlement Mechanism (DSM)
Trade disputes emerge when one State Party feels another has broken its trade agreement obligation. A dispute might arise if State Party C implemented import restrictions on particular items without explanation. That would cause a controversy for State Parties exporting the goods to that nation. AU members created a Dispute Settlement Mechanism (DSM) and a Dispute Settlement Board (DSB) under the Protocol on Rules and Procedures for the Settlement of Disputes.
DSB is still not entirely functioning, but the project remains underway. Select appellate body members await member state approval. This is crucial since it is the sole AfCFTA dispute resolution body. However, the convention requires interstate dispute resolution. Their solutions will vary on their investment’s native state. Other dispute-resolution methods include bilateral investment treaties and domestic courts for private parties. Investors must examine investment areas and rule of law implementation. An unbiased adjudicating system is essential to security and predictability in dispute resolution.
Since African nations have no WTO litigation experience, it remains unclear how often the AfCFTA DSM will apply in dispute settlement. Investors initiated another DSM at the International Centre of Settlement of Investment Disputes (ICSID) to handle investor-state disputes with State Parties.
Critical automotive programs like the Automotive Fund Strategy must be functioning. The Automotive Fund facilitates continental automotive values via its AfCFTA Strategy. The Fund must remain active while RoO discussions continue, which remain crucial to African automotive value chains.
What it means for investors
The AfCFTA represents the world’s biggest free trade area, establishing a single market with free commodities and services. Markets and economies throughout Africa will change, creating new businesses and expanding current ones. By removing tariffs, lowering input costs, and integrating African exports into global supply networks, the accord would increase African governments’ global competitiveness.
Tariff-free access to a large, unified market should improve manufacturing and service production. As demand grows, production follows, lowering unit costs. According to the Mo Ibrahim Foundation, the AfCFTA may create $6.7 trillion in consumer and industry expenditure by 2030.
Opportunities exist, and the AfCFTA promises to expand markets, attract foreign investment, and boost competitiveness and global value chain integration. The AfCFTA aims to boost Africa’s exports and welfare with its operational instruments.