Business Maverick


After Covid-19 delay, the African Continental Free Trade Agreement is back on the negotiating table

After Covid-19 delay, the African Continental Free Trade Agreement is back on the negotiating table
The World Bank says the African Continental Free Trade Area could bolster Africa’s income by $450-billion and lift 30 million people out of extreme poverty by 2035. (Photo: Adobe Stock)

Next year the world’s largest free trade zone in terms of participating countries since the establishment of the WTO will come into being. But many details of the African Continental Free Trade Agreement still need to be ironed out – and Covid-19 delays have not helped. The ATAF/AUC High-level Tax Policy Dialogue on Wednesday will hopefully get the process back on track.

The African Continental Free Trade Area (AfCFTA) came into force in May 2019, four years after negotiations started, when the required minimum of 22 nations ratified it. And with 54 of the 55 African Union member countries having already signed the agreement – Eritrea, which has a largely closed economy, was the sole holdout – a single market of 1.3 billion people is about to be created.

The World Bank sees the pact bolstering Africa’s income by $450-billion and lifting 30 million people out of extreme poverty by 2035, if it is accompanied by significant policy reform and measures to facilitate trade.

In the near term, Bloomberg reports that lower trade costs could help the continent mitigate output losses of between $37-billion and $79-billion due to the coronavirus outbreak.

Talks on driving forward the continental trade area that stalled at the onset of the coronavirus pandemic are being revived by stakeholders and related parties. But there is some way to go.

The agreement aims to lower or eliminate cross-border tariffs on 90% of goods, facilitate the movement of capital and people, promote investment and pave the way for a continent-wide customs union. It will also create a liberalised market for services.

According to PwC, in terms of the agreement, 97% of customs duties levied between member countries will be reduced to zero. The phase-down will differ depending on the tariff headings of products. It was agreed that 90% of tariff lines are to be reduced to zero duty within a five-year period and 7% of tariff lines in respect of sensitive products will be reduced to zero within a 13-year period. Only 3% of tariff lines will remain excluded and still carry a protective duty rate.

The first commercial deal was supposed to take place on July 1 this year but discussions were delayed due to the Covid-19 pandemic, and the rules of origin – which determine the nationality of goods – and tariff concessions are still on the table. 

The next round of talks will focus on competition policy, intellectual property rights and investment protocols. Stakeholders have shifted negotiations online and want trading under the agreement to begin at the beginning of next year – moving to full operation in 2030.

But resolving all the outstanding issues in such a large and diverse group will be a tough ask, even without the Covid-19 pandemic. It has delayed the status of implementation, but also because many countries are still struggling to develop infrastructure (which constitutes one of a variety of other non-tariff barriers).

And if history has taught us anything, hammering out the details of a free trade zone is not an easy thing to do. The Tripartite Free Trade Area – a precursor of the AfCFTA, that sought to combine the common market for eastern and southern Africa, the East African Community and the Southern African Development Community, for example – has been under discussion for about a decade and still hasn’t fully gone into effect.

This week the African Tax Administration Forum (ATAF) in collaboration with the African Union Commission, and supported by the African Development Bank (AfDB) is organising the fourth High-Level Tax Policy Dialogue, entitled Taxing Rights for Africa in The New World & Effects of COVID-19: The Role of Tax Policymakers and Tax Administrators. The virtual conference will be delivered over two days, bringing together tax policymakers and administrators, development partners, industry experts, academics and research organisations.

According to the African Union’s website, the purpose of this dialogue is to bring together critical stakeholders to make coordinated tax policy and tax administration decisions and actions in the ever-changing global tax environment and also to outline priority tax-related issues for collaboration between the African ministries of finance and tax administrations regarding the free trade arrangement.

Once members of the AU work out how to treat matters such as cross-border payments, telecommunications, transport and professional services, some countries will have to amend their domestic regulations to comply.

In an official response to Business Maverick’s questions, ATAF states that the 26 August discussion is expected to provide a cross-sectoral map of the expected impact of AfCTA on customs, as well as opportunities for revenue.

“The discussion is further expected to broadly canvass the status of implementation (postponed to January 2021) including the additional opportunity that this delay has presented in terms of members negotiating tariff concessions,” they say.

“The effect of COVID-19 and the concomitant rise of digital services is expected to receive deliberation as it inevitably touches upon both the dual questions of readiness and capacity.”

In terms of trade creation, it is estimated that African countries will gain by above $2.9-billion, with DRC, Angola and Cameroon gaining the most, with trade creation of $983-million, $451-million and $309-million, respectively.

The AfCTA is set to come into effect on 1 January 2021 and will bring many opportunities for local manufacturers who are uncompetitive due to protective customs duties.

But the removal of protective duties may have a detrimental effect on South African manufacturers and importers, who will then face new competition from within Africa. 

However, the agreement is expected to present vast opportunities and challenges for not only South Africa but other member countries as well, ATAF says.

“South Africa has a relatively strong industrial sector poised to take advantage of the benefits that a low to no-tariff environment is expected to present. Regarding revenues, countries less reliant on trade taxes will benefit. These include South Africa, Eswatini, Lesotho, Mauritius, Mozambique, Namibia and Seychelles,” it states. 

In terms of regional blocs, the Southern African Customs Union (SACU) has the lowest average share of customs revenue (3%).

In terms of trade creation, it is estimated that African countries will gain by above $2.9-billion, with DRC, Angola and Cameroon gaining the most, with trade creation of $983-million, $451-million and $309-million, respectively.

Compared to intra-African trade, currently shipments account for about 15% of the continent’s total trade, compared with 20% in Latin America and 58% for Asia, according to the African Export-Import Bank.

That share could more than double within the first decade of the AfCFTA, the World Bank estimates. The movement of goods has been hampered by non-trade barriers such as poor road and rail networks, delays at border posts and ill-trained or corrupt customs officials. Some experts say removing such hurdles could do more to boost continent-wide trade than the accord itself.

ATAF says what South African tax authorities need to do in preparation for the enactment of the agreement is to ramp up their efforts to enhance their digital capabilities, including the use of analytics and analytical data to monitor and tax transactions accordingly. 

“Greater collaborative work will also need to be fostered between revenue authorities and our Department of Trade and Industry,” the pan-African tax authority states. 

“Equally important, is the need to create a conducive foreign exchange policy environment to enable these transactions to actually take place,” it adds. DM/BM


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