ENDACACID

BRIEFING PAPER

 

 

 THE POTENTIAL GAINS OF
A CONTINENTAL FREE TRADE AREA
FOR THE ECONOMIC AND SOCIAL CONDITIONS
OF ECOWAS CITIZENS  

 

By:   Epiphane G. ADJOVI
   Dr Alioune NIANG 

 

 

INTRODUCTION

Motivated to fast-trackthe establishment of a common African market, Heads of State and government of the continent have decided to establish a continental free trade area(CFTA) in Africa by 2017. The decision, complemented by a roadmap, is a stage in thecreation of a common African market and among otheraims, seeks to boost intra-African trade development.

Creating a common market falls in line with the African transformation program contained in Agenda2063. The vision and action plan of thisagenda outline the establishment of a CFTA in transforming African economies and deepening integration and economic development for the benefit of the continent. 

For members of the Economic Community of West African States (ECOWAS) the implementation of this measure comes on the heels of the concluded Common External Tariff(CET) negotiations adopted in Dakar on October 25, 2013 by heads of state and government of the region.  A fruit of several years of negotiation, the ECOWAS CET, once in force as scheduled by January 1, 2015 will lead to the creation of a customs union. 

For the creation of the CFTA (against the backdrop of economic partnership agreement negotiations between the European Union and Africa regions)to remain a sustainable commitment, various challenges to be addressed by the continent’s stakeholders must be tackled. In light of progress made in this regard, tripartite Free Trade Area negotiations (SADC-COMESA-EAC)could be a stepping stone.

Stakeholders must in effect address two challenges in establishing the CFTA. The first is tied to proper management of various implementation stagesof the process andcontrol of attendant effects. The secondhinges on delivering key conditions for the success of the initiative. 

This paper [1] derives from a literature review and from summary responses to a questionnaire [2] sent out to stakeholders within the region (Commissions, civil society, private sector, and national administrations). It seeks two main objectives. First, it strives to highlight the opportunities and implications of a regional CFTA as well as its potential benefits to trade and development. Its authors equally hope, through it, to add their voice to the debate, bound to further deepen as the stage is set for the creation of the CFTA. 

This briefing paperis set in two main parts. The first part gives a detailed introduction to the proposed free trade area and its expected effects. The second part sets out theoretical and practical conditions necessary for effective implementation of the CFTA and makes recommendations towards achieving the positive expected outcomes of such a process.

 

     1. CFTA AND ITS EFFECTS ON ECOWAS MEMBER STATES 

A free trade area generally comprises partner countries that remove customs duties and quantitative import restrictions among themselves, while maintaining their individual trade policies with third countries. The extent of impact of a free trade area depends on the economic characteristics of the affected area and especially on the nature and intensity of trade among partners.

This analysis of the effects of a free trade area on the economies of member statesdraws on:

  • A general overview of the initiative to establish a free trade area
  • An outline of the context within which the free trade area is being established Progress made in ongoingintegration processes in other regions

 

 

     1.1  Overview of the CFTA

  • Overview of the CFTA process 

While intra-African trade accounts foronly 10% of total trade, intra- regional trade in the EU, Asia and even North America represents 70%, 52% and 50% respectively(UNCTAD 2013). Some analysts argue that thisexplains the vulnerability of Africa to external economic shocks and protectionist trade policies. Africa can reduce vulnerability to external shocks and enhance its trade and economic performance by strengthening its market integration and deepening trade among countries. 

In line with this, at the 18th Summit of AU Heads of State, which took place in January 2012 under the theme ‘boosting intra-African trade’, a technical working group held a series of meetings that led to draft proposals on lifting roadblocks to intra-African trade development and fast tracking the establishment of a continental free trade area. 

The working group was composed of representatives of the African Union Commission, regional economic communities, the Economic Commission for Africa, the African Development Bank and other partners. It submitted an action plan aimed at boosting intra-African trade and a framework document forfast-tracking the establishment of the CFTA for endorsement by heads of state and government.

Both documents were formally endorsed by the 19th African Union Summit and an immediate call on the Economic Commission for Africa (ECA), the African Development Bank (AfDB) and other development partners to support the project and to work with other competent agencies to adopt necessary measures towards effective implementation of the integration program was made.

The action plan draws on theoutcomes of work done by several working groups on issues such as trade policy, trade facilitation, production capacity, trade-related infrastructure, trade information, trade finance and factor market integration.

Among other details, the action plan indicates a specific timeframe (short and medium term) for the implementation of pointed activities identified by the groups andresponsibility for action in this process at different levels: national or member state, regional communities, continental (African Union) and other stakeholders, partnersand the private sector. The action plan takes on board existing initiatives already adopted by Policy Organs of the African Union such as the Action Plan for the Accelerated Industrial Development of Africa (AIDA), the Programme for Infrastructure Development in Africa (PIDA) and the Minimum integration programme (MIP).

The proposed roadmap builds on progress already made on the continent, in particular the pioneer experience of the COMESA-EAC-SADC tripartite free trade area (ECA, 2012). Based on this, the roadmapproposes the following three-phased approach:

  • Establishment of the COMESA-EAC-SADC tripartite free trade area by 2014; and completion of free trade areaprocesses in other regional economic communities, while allowing parallel interregional arrangements similar to the tripartite free trade area;
  • consolidation of the tripartite free trade area and other regional free trade areas towards the achievement of a CFTA between 2015 and 2016;
  • Establishment of a CFTA by 2017 in line with the timeline and stages outlined in the Abuja Treaty with the option to review based on progress made.

The roadmap is complemented by a framework that defines the institutional architecture, monitoring and evaluation mechanisms and a dispute settlement system. The structure includes organs such as:

  • A high level tradecommittee, comprisingheads of state of various regional economic communities and their directors general, and createsamong others:
  • A CFTA negotiation forum;      
  • A trade observatory to address the challenge of access to trade information; a business council to serve as a platform for private sector contributions to policy making;     
  • A trade forum that allows all stakeholders to discuss intra-African trade

 

Given the current structure of trade in Africa and the state of playin regional integration organizations on the continent, a number of questions arise:

Might it be said that this initiative is over ambitious?

Do the expected outcomes of a CFTA justify embarking on such a process?

What are the requirementsfor an optimal CFTA? 

 

  • Trade Trends and Trade Partners 

Africa remains a marginal player in world trade (2.8% and 2.5% of world exports and imports in the period from 2000 to 2010). However, it is of note that trade on the continent has been rising fast (real export growth of 5.2%) according to UNCTAD, 2013.

UNCTADdatahowever shows thattotal intra-African trade rose to $130.1 billion in 2011, being an 11.3% increase in total African trade. These figures speak in relative terms nonetheless, as there has been a significant surge in informal (unregistered) intra-African trade on the continent.

Another characteristic of intra-African trade is that it is carried out within regional trade blocs. Thus, with the exception of ECCAS and COMESA (21% and 32%)intra-African trade within a given community ranges from 94.2% in SADC to 57.6% in the EAC.



Table 1 : Intra-African trade  1996-2011-Distribution of shares,   

With regards to ECOWAS,West Africa is a very minor actor in international trade. Indeed, in spite of progress made over previous years,it contributes a very small share of world trade. In terms of value, it only accounts for 0.7% of world exports and 0.5% of imports. It is however noteworthy that West Africa is the largest exporter of cocoa in the world.

In recent years, ECOWAS trade has risen by an average 18% yearly between 2005 and 2010(ENDA CACID, 2012). This increase however, has been unstable. In 2006, trade surged to28% from 2005 as against just 1% in 2007. It saw a 57% burst in 2008 and then fell to 33% in 2009.Growth recovered in 2010 with an increase to 36% from 2009.

 

Figure 1: Recent Developments in ECOWAS Trade

Source: State of Trade in West Africa, ENDA CACID 2012

 

Overall, trade in the Economic Community of West African States is dominated by Nigeria, Côte d’Ivoire, Ghana andSenegal.  In real terms, ECOWAS is just ashadow of Nigeria which alone accounts for 77% of total community exports and re-exports. It alone represents 60% of regional trade ($92,696 million a year) and 79% of ECOWAS exports excluding re-exports ($63,702 million a year). West Africa is the dwarf of international trade.

Europe accounts for about 28% of ECOWAS Exports, with 23% destined to the European Union (EU 27). As the European Union slowly loses its share of the West African market to emerging economies (China, Brazil, India, and South Africa) however, an attempt at repositioning itself through the EPA is being made.The Americas account for 40% of which 34% is destined to the North American Free Trade Agreement (NAFTA)comprising the United States, Canada and Mexico. West African exports (68% total)are primarily destined to Europe and the Americas with 57% to the EU and North America, thereby confirming the strength of historical ties. By absorbing 34% of ECOWAS exports, NAFTA member states steal the limelight from the EU, traditional partners of the community.

 

 

Figure 2: Share of ECOWAS trade with other country groupings

Source: State of Trade in West Africa, ENDA CACID 2012

 

In spite of reforms made over the past twenty-five years under structural adjustment programs, the structure of the West African economic sector has not changed significantly. It includes a primary, secondary and tertiary sector which contributes up to 45%, 22% and 33% respectively to regional GDP.There is a current rise intrade in services, though it is difficult to assess real values given the prominence ofthe informal sector. Therefore, financial transactions rank first in trade in services. This is favored by the regional expansion of major banking groups: UBA (United Bank for Africa),EcoBank, Bank of Africa, Diamond Bank, BanqueAtlantiqueOthers, such as the NSIA combine banking and insurance services. BTP and tourism are also making inroads into the community market with a rise in the number regional groups.

 

  • Status of Integration in Africa

 

There has been limited progress on integration in the eight Regional Economic Communities. The establishment of an African Economic Community would bephased (AU, 2014). Based on the scheduled phases, implementation of the Abuja treaty is at its third stage which is the creation of free trade areas and a regional customs union before 2017.

Five regional economic communities have achieveda free trade area status and have launched programs to lead the establishment of their respective customs unions before 2017. These are COMESA, the East African Community (EAC), the Economic Community of Central African States (ECCAS), ECOWAS and the Southern African Development Community(SADC).

Still at the stage of coordination and harmonization of member state activities are: theIntergovernmental Authorityon Development (IGAD) and the Community of Sahel-Sahara States (CEN-SAD).

With the implementation of its common external tariff in January 2015, ECOWAS will become a ‘customs union’. Thus, the region is in phase with the timeline fixed by the Abuja treaty. Nonetheless there still remains a lot to be done to fully operationalize the community free trade area. Assessments have clearly shown that the ECOWAS Trade Liberalization Scheme still faces obstacles to implementation.

The pace of progress of various RECs shows that two key factors would determine the attainment of objectives within stipulated timeframes. These are: i) a successful implementation of the tripartite FTA and ii)the conclusion of an ETLS and the ECOWAS customs union.

The tripartite free trade area will cover 26 countries from the Common Market for Eastern and Southern Africa (COMESA), the Southern African Development Community (SADC) and the East African Community (EAC). These countries represent a little over 625 million consumers. Their Gross domestic product is about 1,200 billion USD and the countries covered make up half of the total number of African Union members and 58% of Africa’s total GDP. The new tripartite free trade area will be the largest economic bloc on the continent and will be a platform for the launch of the CFTA in 2017.

Most actors in the sub region question the sufficiency of the two years left till 2017.

 

Would therebe enough time to completely conclude an ETLS and ECOWAScustoms union[3] ?  

 

 

1.2.      Effect Analysis 

Theoretically, the elimination of tariff and non-tariff barriers within a region would reduce distortions associated with such measureswhile increasing the volume of trade, reducing customs revenue and improving the living standards of households in the region. The creation of an efficient free trade area equally allows for the expansion of efficient business production through economies of scale arising from the competition characteristic of open markets.

Both static and dynamic effects may be distinguished when determining the impact of free trade areas. As a static effect, we observe that the removal of customs duties and other tariff barriers within the area may contribute to increased trade among partners. This increase is translated to either a redirection or a stimulation of trade. Only where there is more stimulation of trade than there isredirection,are positive effects felt by households.

Similarly, dynamic effects favor growth in partner countries when the implementation of a free trade area is accompanied in real terms by economies of scale in various branches of the economy and the area increasingly attractsforeign investment.

Furthermore, the presence of partner countries of varying economieswithin anarea could have negative effects on the weakest economiesin the short term. The positive impact ofeffects in this category of countries is felt more slowly as they progressivelyadapt to a competitive environment.

Although detailed assessments do not exist on the subject, evidence has shown that the ECOWAS trade liberalization scheme has not significantly boosted trade among its member states.In addition, ECOWAS continues to experience difficulties in the process and there are very mixed results from the application ofits Trade Liberalization Scheme.

To determine a specific indication of the real impactof the CFTA as well adjustments necessary for its establishment, it would be important for ECOWAS and indeed all regional economic communities to undertake a rigorous impact assessment. The study would necessarily take on board the peculiarity of each given region: size of the region, status of internal processes, level and composition of trade with other countries on the continent. 

 

2.  

IMPLEMENTATION OF THE CFTA AND CONDITIONS FOR EFFECTIVENESS 

Among other issues, the CFTA negotiations would address (i) the pace at which customs duties are removed, (ii) compensation on revenue losses and (iii) rules of origin. On the last point, negotiations must take into account current rules of origin being applied within regional economic communities and those to be applied in the framework of economic partnership agreements with the European Union. Therefore it is important that a harmonization of rules of origin be undertaken by the various regional economic communities.

In the same vein, if the CFTA is to truly translate to an increase in intra-African trade, certain barriers to trade must be lifted. These include, among others, low production capacity and crippling infrastructure deficiencies in Africa.In light of this, the strengthened and unreserved commitment of member states to lead the process to itsultimate goal of opening continental pathways is imperative. This commitment further calls for the involvement of non-state actors.

 

2.1. Infrastructure, Policyharmonization and Trade facilitation

One major obstacle to integration in Africais unsuitable physical infrastructure.Though available, transportation networksare inadequate and sometimes of poor quality in comparison to other regions. In addition, transportation costs have remained the highest in the world. In light of the key role of infrastructure in trade facilitation, there is no question that it is essential for the success of the CFTA.

In general, African products have a competitive cost structure as they exit the farm or factory. More often than not, it is in the process of border transfers thattransport, storage, handling and customs related procedures raise the cost of exporting merchandise. (AU, 2012). Thus, it goes without saying that transport facilitation is also a key to successful trade liberalization on the continent.

Additionally, given that trade volumesarelow and mostly undiversified, a major priority to undertake is that of strengthening production base in general and industry potential in particular.

Accordingly, several factors, each as relevant as the other, would determine the success of establishing a CFTA: the reduction of tariff and non-tariff barriers, harmonization of rules of origin, adequate infrastructure of quality and quantity, the removal of non-physical obstacles through a good trade facilitation policy and common sectoral policies to strengthen the production base.

 

 

2.2.Integrating non-state Actors and other activities for implementation

The action plan developed by the African Union Commission provides for a negotiation forum in the establishment of the CFTA. It is the hope of regional authorities that the forum sets an appropriate stage for experts of REC commissions, who have honed their negotiation skills in the framework of discussions with the EU on the EPA.The forum is also expected to involve non state actors who have pulled their weight through positions they have taken and their strong involvement through analyses and proposals made throughout the EPA negotiation process.

The African Union Agenda 2063 and work program are fundamentallymodeled on a participatory approach aimed at involving all stake holders at national, regional and continental levels. With a view to promoting participative trade governance, non-state actors and the African civil society greatly welcomed and encouraged the African Union on its decision to create the CFTA which it considers a major continental initiative. These actors hope, nonetheless to be directly involved and regularly consulted on the work and activities of the Union with a view to achieving continental economic integration.

ECOWAS had extensive experience involving non state actors in the EPA negotiations with the EU. This experience should be built upon in the process of establishing theCFTA.

In addition to involving non state actors, ECOWAS should by and large undertake:

  • The development of a complete impact assessment to identify necessary adjustments to favor the process;

  • Widespread sensitization of the region on the CFTA and its implications. 

 

 

CONCLUSION

Given the current level of trade in the West Africa region,in theory the potential benefits of a CFTA willinclude an increase in the volume of trade thus improving the living standards of households in the region.The creation of an efficient free trade area will equally allow for the expansion of efficient business production through economies of scale arising from the competition characteristic of open markets.

However, the establishment of a CFTA brings on a real challenge for the continent’s political leaders, chief executives of regional economic communities and other economic players on the continent. The reality is that there would be a need for the continent to achieve, within a very short period, what regional economic communities have scarcely achieved after so long.

The challenge involves:(i) the successful establishment of the tripartite free trade area, (ii) setting realistic deadlines in light ofprogress made by regional economic communities, (iii) correctly resolving the issue of rules of origin (iv) successful development of infrastructure and trade facilitation measures tocomplementthe elimination of customs duties, (v) promote production through common sectoral policies and (vi) involve non state actors throughout the process to ensure that all are up to date.

 

 

Based on this conclusion and stakeholder feedback, the following recommendations may be made:

  • Taking into account African realities, the deadline of 2017 should not be rigidly adhered to. Rather the priority should be on deepening ongoing liberalization processes in regional economic communities;          
  • Undertake rigorous impact assessments to better enlighten stakeholders on the outcomes and options as well as necessary adjustments;          
  • Involve experts of the region as well as non-state actors in the establishment of the CFTA to best harness the benefits of their experience in negotiation.

BIBLIOGRAPHY

 

  • African Trade Forum (2012), “Boosting Intra-African Trade and Establishing the Continental Free Trade Area (CFTA)”, Background Note
  • AU (1991), “Treaty Establishing the African Economic Community”
  • AU(2014), Draft framework, Road map and architecture for fast tracking the Continental Free Trade Area”
  • ECA (2010“Enhancing Intra-African Trade”,Assessing Regional Integration in Africa IV
  • ECA (2012) “Towards an African Free Trade Area”, Assessing Regional Integration in Africa V
  • ENDA CACID (2012) The Reality of Trade inWest Africa”ENDA CACID 2012
  • UA (2012)“Boosting Intra-African Trade : Issues Affecting Intra-African Trade”, Action Plan for boosting Intra-African Trade and Framework for the fast tracking of a Continental Free Trade Area (African Union Conference: Eighteenth Ordinary Session 29-30 January 2012 Addis-Ababa  (Ethiopia)
  • UNCTAD (2013) “Intra-African Trade: Unlocking private sector dynamism”Economic Development in Africa.

 

 

ANNEXE

Table A1: Progress on stages of the Abuja Treaty


Source: Assessing Regional Integration in Africa V, ECA, Addis Ababa 2012,

 

Note: X represents the current level of implementation of stages of the Abuja treaty

 

Q3: Would the creation of a CFTA within this deadline delay or disrupt the implementation timeline of the West African Customs Union?

 

 

Answer

Respondents

Percentage

 

Yes

6

75,0

 

No

2

25,0

 

Total

8

100,0

Q5 Infrastructure

   

 

Answer

Respondents

Percentage

 

Yes

7

87,5

 

No

1

12,5

 

Total

8

100,0

 

     

 

Q5 Trade information

   

 

Answer

Respondents

Percentage

 

Yes

5

62,5

 

No

3

37,5

 

Total

8

100,0

 

     

 

Q5 Trade facilitation

   

 

Answer

Respondents

Percentage

 

Yes

8

100,0

 

     

 

Q5 Removal of non trade barriers

 

 

Answer

Respondent

Percenatage

 

Yes

5

62,5

 

No

3

37,5

 

Total

8

100,0

 

     

 

Q5 Other

   

 

Answer

Respondent

Percentage

 

ND

7

87,5

 

Quality and traceability

1

12,5

 

Total

8

100,0

 

 

 

 

 

 

 

 

   

 

 

Q7: Giventhe circumstances in RECs, is it possible to establish a Continental Free Trade Area in Africa within three years?

 

 

Answer

Respondents

Percentage

 

No

8

100,0

 

Q8: Is currency a roadblock to trade?

 

 

Answer

Respondents

Percentage

 

Yes

2

25,0

 

No

5

62,5

 

Total

7

87,5

 

Gap

1

12,5

 

 

8

100,0

             

 


[1] Produced by the Centre Africain pour le Commerce, l’Intégration et le Développement (ENDA CACID), and funded by the SWARIP Regional Policy Fund of the Department for International Development (DFID)

[2] See questionnaire in annex

[3]See Table : Summary of responses to the Questionnaire

Buy Vytorin
  • ACTUALITES / INTEGRATION ET COMMERCE INTRA REGIONAL EN AFRIQUE