AfCFTA How to Trade Freely in Africa PDF

HOW TO TRADE FREELY IN AFRICA (All About African Continental Free Trade Area AfCFTA) Dr Emeka Osuji, Associate Professor School of Management and Social Sciences Pan Atlantic University,...

HOW TO TRADE FREELY IN AFRICA (All About African Continental Free Trade Area AfCFTA) Dr Emeka Osuji, Associate Professor School of Management and Social Sciences Pan Atlantic University, Lekki, Lagos Lagos, June 15, 2021 African Continental Free Trade Area African Continental Free Trade Area 2 Preamble The AfCFTA is the culmination of many years of efforts to deepen intra-African relations But due to recent developments the essence of RTAs has come under critical review: Europe (the European Union) - One of the most celebrated economic Blocks; but Brexit happened Africa - Despite being the most integrated continent its internal trade is the lowest in the world USA: America First hits at NAFTA So we find that recently, many key proponents of Globalization tend to favour protectionism So why AfCTA at this time some may ask 3 THE THEORY OF CUSTOM UNION Trade Creation: Union-induced shift from the consumption of higher-cost domestic products in favour of lower-cost products of the partner country. Production effect: The reduction or elimination of the domestic production of goods, instead being imported from the partner country. Consumption effect: Increased consumption of partner-country substitutes for domestic goods that were formerly satisfied at a higher cost. THE THEORY OF CUSTOM UNION Trade Diversion: Union-induced shift in the source of imports from lower-cost extarnal sources to higher-cost partner sources. An increase in the cost of the goods previously imported from abroad. A loss of consumers’ surplus resulting from the substitution of higher cost partner goods for lower cost foreign goods. Some Facts on Global Trade Nigeria is Africa’s largest economy but its biggest trading partners is not in Africa, Africa has the lowest intra-continental trade in the world averaging between 12 and 18% Africa trades more with Europe, Asia, and North America than itself Intra-US trade is up to 50%; Asia and Europe respectively sometimes reach as much as 60% and 70% This places African SMEs at a relative disadvantage, being largely cut off from the benefits of intra-continental trade This is why the African Continental Free Trade Area (AfCFTA) agreement was signed in 2018 6  Some Facts on Global Trade A Comparative analysis of intra-regional trade showed: Intra-African trade at 15%; Intra-North American trade approx. 48% Intra-EU trade approx. 64% Intra-Latin America 20% Intra-Asian 58% Intra-African trade is the lowest and her share of world trade is estimated to be only 3%. 7 Africa is least in Intra-Continental Trade 8 Africa’s Trade Profile Africa’s Intra-regional trade in Africa is: Largely informal, Poorly documented, Dominated by staple food items. In Nigeria, only 19% of the small firms engage in exports, while 29% of the medium-scale firms engage in exports SMEs in the advanced economies account for between 34% - 65% of exports. In Nigerian SMEs contribution grew from 7.27% - 7.70% of total non-oil exports between 2013 - 2017 9 Africa’s Trade Profile Africa’s Trade profiles show little diversification in exports Primarily a limited number of raw materials Imports are more diversified; industrial products Food items are sadly an increasing item of import due to: Poor agricultural practice/Infrastructure Famer displacements caused by: Political unrest/Tribal wars Natural disasters like drought; and such 10 Why Nations Trade Trade as fundamental wisdom – No man should make what he can buy more cheaply than it will cost him to make and vice versa We may recall Adam Smith way back in 1776, who Gave us the theory of Absolute Advantage But 100 years later a young man David Ricardo, overthrew Adam Smith insisting that Comparative Advantage is the basis of all trade Trade has been called an engine of growth Production Possibility limits consumption Only trade permits consumption beyond production possibility boundaries Trade and economic welfare are positively correlated Trade expands consumption choices - Trade Can make everyone better 11 Role of SMEs in the Economy Engine of growth – Creation of entrepreneurs, generate jobs and incomes and spur creativity (96% of Nigerian businesses), Produce 50% of GDP and employ upto 76% of workforce in Nigeria African SMEs account for up to 80% of businesses and contribute up to 40% of national income. Economic Back stopper and Buffer – Refuge of the marginalized Make heterogeneous products that can advance economic diversification 12 The Making of AfCFTA The AU wants “an integrated continent, politically united and based on the ideals of Pan-Africanism” – Agenda 2063 Trade is fundamental to welfare and integration of people This aligns with the rush to regionalism/Economic grouping now at play The WTO reports large increases in Regional Trade Agreements Without trade, integration will not be optimally productive Sadly, Africa is historically low on intra-regional trade 13 The Making of AfCFTA Hence the decision in 2012 to set up AfCFTA To promote intra-African trade and more cohesion To achieve a single liberalized market for goods and services By 2018, in Kigali, 44 of the 55 Heads of State and Govt had signed the agreement Practically all Africa has agreed to the agreement ACFTA is considered the largest free trade area in the world and Africa’s biggest accomplishment of all times 14 Objectives of AfCFTA AfCFTA covers trade In goods, services, investment, intellectual property and competition policy, took effect May 30, 2019 Aims to Boost intra-African trade and bring the people closer Double intra-African trade by 2022 Harmonization, Coordination and Facilitation of trade Resolution of challenges of multiple and overlapping memberships of economic blocks like ECOWAS, COMESA, EAC, SADC Member can withdraw after 5 years and it shall be effective after two years. 15 Strategy for Achieving Objectives Progressive elimination of tariff and non-tariff barriers to trade in goods Progressive liberalization of trade in services; Cooperation on investment, intellectual property rights and competition policy; Cooperation on trade, customs and the implementation of trade facilitation measures; Establish a mechanism for the settlement of disputes concerning rights and obligations of members; Provide a mechanism for Information dissemination to economic agents 16 Curbing REC Overlap: 8 RECs recognized Arab Maghreb Union (AMU) Common Market for Eastern and Southern Africa (COMESA) Community of Sahel-Saharan States (CEN-SAD) East African Community (EAC) Economic Community of Central African States (ECCAS) Economic Community of West African States (ECOWAS) Intergovernmental Authority on Development (IGAD) Southern African Development Community (SADC) An African country belongs to at least 1 REC, while 31 African nations belong to at least 2 RECs 17 Arab Maghreb Union (AMU) Algeria Libya Mauritania Morocco Tunisia 18 Common Market for Eastern and Southern Africa (COMESA) Horn of Africa North Africa Indian Ocean African Great Lakes Southern Africa Southern Africa Central Africa 19 Community of Sahel–Saharan States (CEN-SAD) Members are: Benin, Burkina Faso, Central African Republic, Chad, the Comoros, Côte d'Ivoire, Djibouti, Egypt, Eritrea, the Gambia, Ghana, Guinea- Bissau, Libya, Mali, Mauritania, Morocco, Niger, Nigeria, Senegal, Sierra Leone, Somalia, the Sudan, Togo and 20 East African Community (EAC) Kenya Tanzania Uganda Burundi Rwanda South Sudan 21 Economic Community of Central African States (ECCAS) Angola (member of ECCAS and SADC, but not CEMAC) Burundi (member of ECCAS and EAC, but not CEMAC) Cameroon (member of ECCAS and CEMAC) Central African Republic (member of ECCAS and CEMAC) Chad (member of ECCAS and CEMAC) Republic of the Congo (member of ECCAS and CEMAC) Democratic Republic of the Congo (member of ECCAS and SADC, but not CEMAC) Equatorial Guinea (member of ECCAS and CEMAC) Gabon (member of ECCAS and CEMAC) São Tomé and Príncipe (member of ECCAS, but not CEMAC) Rwanda (member of ECCAS ) 22 Economic Community of West African States (ECOWAS) Over 350m people including Nigeria, with about 2/3 of the population 23 Intergovernmental Authority on Development (IGAD) An eight member trade block. Interested in the environmental safety and development of the members 24 Southern African Development Community (SADC) By 16 countries of Southern Africa seated in Gaborone, Botswana. 25 Intra-African Imports Lag Behind Non-African Imports 26 Intra-African Exports Lag Behind Non-African Exports 27 Intra- and Inter-Regional Imports Among 5 Regions of Africa 28 Intra-Regional and Inter-Regional Exports Among 5 Regions of Africa 29 Comparative Leadership in Intra-African Trade 30 Trading Freely - Competitiveness The ability of a nation to create and maintain an environment that sustains more value creation for its enterprises and more prosperity for its people“ – World Competitive Centre (2018). Ability to match others in your business in price and Quality, Standards and strength and resilience Essentially Competitiveness is the relative ability of an entity/economy to: Innovatively Raise and Sustain Productivity, Produce High Quality Goods and Services at competitive prices Favourably and profitably participate in international trade in a way that Your Product Speaks Good of you and not become disgrace to the maker Our SMEs must be Competitive to trade profitably across Africa 31 Competitiveness Analysis 2012- 2016 -UNECA REPORT Based on UNECA’s classification 4 countries were selected from each of the 5 Regions of Africa for assessing their Competitiveness The East Africa Region was on top while the Central Africa region was the least on the Competitive Table Rwanda was the most competitive 32 Trading Freely: Factors Impacting Competitiveness Operating Environment Huge infrastructural deficit leading to Cost-Push price inflation Poor trade logistics Support – Export Incentives, Transport and Storage Now Nationwide Insecurity - SMEs are mostly in the conflict zones (Impact on free movement of people and goods) Our Chance lies in the Services and we can raise the quality –e.g Movies Supportive Financial Markets – Interest Rates/Exchange Rate Stability and Predictability –Role of the Apex Bank Financial Inclusion and Access and Availability of Cross-Border Payment Systems Intelligent Regulation and Policy Weak legal frameworks for conflict resolution Extent of protection against foreign competition Degree of Ease of Doing Business. Nigeria began Export Incentives in 1976 with the establishment of NEPC Yet Exports are only about 5% of SME Manufactures 33 Trading Freely - Internationalize Uppsala Model - Internationalization driven by Knowledge – The Incremental Theory Learn, Invest and enter the international market Networking can help firm pull resources together to enter a foreign market. Born Global – New Venture Theory Go straight to the international scene In all the underlying power of innovative leadership and vision cannot be underestimated Thinking Local and Acting Global is an attribute of modern globalized institutions - Dynamic Capabilities and access to innovative resources have also been projected as key attributes for internationalization of SMEs – Ability to speak the key languages – English, French, Portuguese and Arabic However, Place and Policy are critical to the ability of firms to attack the foreign market 34 AfCFTA and SMEs in Nigeria: Awareness Levels Awareness: According to NACCIMA Low level of awareness regarding the existence of the AfCFTA is a challenge - 67% of respondents were unaware of the Agreement (2020) Low awareness may keep them from scaling operations abroad. A 2020 survey indicated very low levels of awareness of the AfCFTA agreement on the part of Nigerian SMEs. As can be seen this is lower among Figure: Awareness Levels of AfCFTA among Nigerian MSMEs the micro and small firms, with only 18% being aware. 35 and 7% respectively AfCFTA and SMEs in Nigeria: Awareness Levels The low awareness among Nigerian SMEs becomes worse when viewed at sectoral levels. MSMEs in the agriculture and services sectors have the lowest awareness levels of 3% and 7% respectively. But agriculture accounts for the bulk of Nigeria's non-oil exports, while services is now the largest sector of the Nigerian economy. If SMEs in these sectors have such low levels of awareness of AfCFTA, effective participation Figure: Awareness Levels of AfCFTA among Nigerian might elude us. MSMEs based on Economy Sectors 36 Trading Freely in Africa: The Way Forward Improve Capacity: Knowledge of international business (including AfCFTA) is low SMEs must be able to Identify their market, study it and take position. Every trade has secrets – Don’t get into what you don’t understand (Ask Igbo Traders) Organization: Be organized (individually and collectively) - Networking Govts will review many customs regulations, Rules of Origin (ECOWAS 60%, COMESA 40%), etc. Plastics and Packaging - Be part of the Negotiations. 37 Trading Freely in Africa: The Way Forward Technology: Technology adaptation among SMEs is low and the world is digital International Online Sales went up 44% since 2012 (WTO) 86% was Business - to - Business; implying a better chance for deals with foreign SMEs counterparts than individual customers – Be part of Value Chain BIO is said to be partnering SMEs to Digitize Women’s Businesses Africa’s 1.27b market will rise to 1.7mb by 2030. There is no space for SMEs stuck in analog antiquity Trading Freely in Africa demands Connectivity over the borders 38 Trading Freely in Africa: The Way Forward Finding Your Place in Value Chain Globalization has put everyone in a common pool No single country can claim to make any good now Goods are now “Made in the World” as components come from everywhere Only 32% of world Auto exports come from the Auto Industry; 40% comes from the Service Sector companies – That is a Value Chain to plug into. There is room for SMEs in the Value Chain. Find it! Careful Review and Harmonization of Trade Policies Employ the experience from the RECs 39  Trading Freely in Africa: The Way Forward Nigeria Must Curb Influx of Cheap Imports and Transshipment: How do you control the influx of cheap goods in a borderless Africa? Don’t Sacrifice Local Producers: They may lose sales to foreign suppliers who can lower their costs by leveraging the reduced tariffs One African market is not the abolition of National Interest/Boarders Free Trade is not Laissez-faire – Actually no pure free market economies really exist, Orphaned SMEs will not hold their own in the comity of Enterprises. Luckily AfCFTA has room for members who prove need for protecting their Infant Industries 40 Trading Freely in Africa: The Way Forward Support Against Foreign Competition: imposed on imported goods, and can into the market. Finance and its Infrastructure: Big deals for SMEs to scale up to foreign markets. Poor Network Infrastructure: travel and transport between African countries and regions via roads, rail and air need a boost to be more efficient. Digital infrastructure and stronger internet penetration will also be needed for SMEs to take full advantage of the agreement. 41 Trading Freely in Africa: The Way Forward Currency Convertibility: The absence of a convertible currency reflects on exchange rate and competitiveness. There is need to for a system that mitigates the exchange losses that happen at both ends of trade in Africa. Improved financial infrastructure including investment guarantees against expropriation African leaders must avoid consumerism Reverse the commonality of product from AU members - hampers trade as none has the manufactures that feature prominently in their imports 42 Trading Freely in Africa: The Way Forward Africa’s future policy design must recognize factors, structures, actors and institutions that explain her trade dynamics – formal & informal trade These need to be taken into account when designing and implementing policies A coordinated attempt to promote inward-looking trade and consumption patterns should be prioritized 43 Conclusions Globally there is a rush to regionalism. Protectionism is coming back forcefully Africa has some of the largest numbers of Regional Economic Communities/blocks Africa still has the lowest intra-continental trade ratio at 15% Over the past two decades, intra-African imports have consistently lagged behind extra-African imports Africa buys from outsiders what it produces as well as what it does not produce 44 Conclusion But intra-African exports is growing faster than non-African exports raising hope for AfCFTA West Africa Leads in intra-Africa imports while Southern Africa leads in exports – Not exactly a positive outcome South Africa, Nigeria and Namibia are intra-African trade champions and can lead the campaign East Africa is the most competitive region South Africa and Namibia top the competitive list Implementation is critical in achieving the objectives og the agreement 45 CLOSE THANK YOU 46