Political will key to African free trade

Barclays Africa chief executive Maria Ramos discusses the controversies around free 
trade and government. Photo: Lisa Skinner

Barclays Africa chief executive Maria Ramos discusses the controversies around free trade and government. Photo: Lisa Skinner

Despite the slow pace of trade regime harmonisation in Africa, the various regional initiatives to eliminate tariffs and other trade barriers will eventually bear fruit and boost business, experts believe.

“It is all about baby steps, as long as they are moving in the right direction,” says Venter Labuschagne, head of the KPMG Africa Tax Solutions Centre. He hails the signing of the Tripartite Free Trade Area (TFTA) agreement in Egypt earlier this month as an important moment. “It had been postponed many times, so this really sends the right message. Businesses are seeing huge opportunities and are tremendously positive about Africa. Harmonising trade regimes will only bolster those opportunities.”

Many trade experts say that the future of free trade is largely in the hands of politicians, a sentiment echoed by Barclays Africa chief executive Maria Ramos during a recent panel discussion on the future of Africa’s capital markets at the World Economic Forum (WEF) on Africa in Cape Town. “Frankly, and I know it’s always controversial when you say it, but it actually takes political will to get this done. You cannot get the rules of the game harmonised without getting the people who make these rules around the table,” she says.

The free trade zone from Cape to Cairo is scheduled to commence in the next few years, although many technical details still need to be ironed out by the 26 member countries. The TFTA is an agreement between three partly overlapping regional groups: the Southern African Development Community (SADC), the Common Market for East and Southern Africa (Comesa) and the East African Community (EAC). When the agreement comes into effect it will create a market of 626 million customers, including a rapidly emerging middle class.

Mark Schoeman, researcher at the South African Institute of International Affairs, told Bloomberg that the signing is “quite a milestone”, but cautioned against too much optimism. In the SADC free trade zone, which came into effect in 2008, only 20% of trade is with other member states — compared to 70% in the European Union and 55% within Asia. “On paper it sounds really great,” says Schoeman. “But there has really not been a lot of increase in trade among SADC members.” 

According to Labuschagne, a KPMG partner who works with large firms trading across the continent, that comparison is not entirely valid. “The SADC economies are similar in their character, which means there is no big need for internal trade. They all have similar industries and raw materials. The benefit of the TFTA would be to link economies that are vastly different.”

Soamiely Andriamananjara, econo–mics lecturer at George Washington University, recently pointed out that merchandise exports among the members of the TFTA have grown twenty-fold from R28-billion to R437-billion between 1994 and 2014. In that period, intra-regional trade increased from 7% to 25%. Andriamananjara also notes that in the past various regional initiatives have created “a confusing mixture of overlapping, sometimes incompatible, preferential trade regimes”. The TFTA, he argued in a blog for the US-based Brookings Institution, is “potentially a game changer”.

While Labuschagne acknowledges that overlapping trade blocs have made things complicated in the past, he feels that “further SADC integration and the TFTA can be developed in parallel”. 

Harmonising of trade regimes

The KPMG partner argues that the mere fact that countries are slowly but surely working on harmonisation of trade regimes already has a positive effect. “Things don’t happen overnight. The more documentation is harmonised, the easier it becomes for businesses. Meanwhile, increased expenditure on road infrastructure and the creation of one-stop borders also help.”

During the African Union summit the body’s trade commissioner Fatima Haram Acyl announced the start of negotiations for a continent-wide free trade zone, spanning all 54 African countries and aiming for a starting date in 2017. According to Haram Acyl the TFTA provides a perfect launch pad for this. “They negotiated on goods, negotiated their schedule of liberalisation. This is very good news for us, so we are not starting from scratch.” 

Labuschagne lauds the initiative: “The Continental FTA is much more ambitious than the TFTA. Luckily a lot of lessons have been learned during the establishing of the TFTA and it won’t be the same blueprint.”

Participants of the WEF panel on the future of trade in Africa concluded earlier this month that removing impediments to the movement of goods and people around Africa is critical for economies to develop. At the moment only 12% of African countries’ total trade is with each other and the continent only accounts for 3% of value addition in global trade. 

Yonov Agah, the deputy director-general of the World Trade Organisation, said that trade policies, infrastructure and governance structures are all crucial for the success of the Continental Free Trade Area (CFTA). “At the end of the day it’s about how a country and a region like Africa manages the interaction of these external and domestic factors that would provide the frame as to how you benefit.”

Labuschagne predicts that one of the major challenges on the path towards further harmonisation, besides things like timing of implementation and exemptions, will be the rules of origin which are used to determine the country of origin of a product for purposes of international trade. “These rules are already different for Comesa, the EAC and SADC. With Ecowas (Economic Community of West African States) included in an Africa-wide zone it would be even more difficult, because those West African economies are very different.”

To illustrate the technical difficulty negotiators will have to deal with, Labuschagne explains the rules of origin with an imaginary business that has set itself up in Botswana to service the SADC region. “To get origin in Botswana it needs to comply with a host of technical rules, which impact their entire procurement function, for example. 

“If you change the rules of origin, the way they have set themselves up might mean they suddenly lose that origin. This has major implications.”

Trade at different stages of development

Another major problem is that African countries are in “vastly different stages of development”, Labuschagne says. “That is very difficult for further harmonisation between SADC countries — what do you do with tax revenue for import from outside the union? Revenue in South Africa is relatively high, but a poor, smaller, land-locked country like Malawi does not contribute much.” On a pan-African scale this issue is exacerbated; the Seychelles’ GDP per capita is almost $16?000, while Burundi lags at $270.

In 2013 Ron Sandrey wrote an analysis of the SADC Free Trade Area for the Stellenbosch-based Trade Law Centre, which confirmed “the commonly accepted position that intra-SADC trade is low (and not necessarily increasing) and that South African trade dominates both the overall SADC and intra-SADC trade”. Although Sandrey admits that “trade data for the SADC region and the rest of the continent are notoriously unreliable and difficult to obtain”, he mentioned that “in 2010 South African exports were 68% of intra-SADC exports”.

“That doesn’t mean harmonisation is not a good idea for South Africa,” says Labuschagne. “There are also a whole lot of political considerations, not only commercial. But the lesson from SACU — the Southern African Customs Union — has been that it does favour the smaller countries like Lesotho and Swaziland, but also Namibia and Botswana, at the expense of South Africa.” 

Customs union

SACU prides itself on being the “oldest in the world” with roots dating back to 1910. It consists of Botswana, Lesotho, Namibia, South Africa and Swaziland. SADC’s free trade area includes SACU and a group of countries further to the north, but member states Angola, Democratic Republic of Congo and Seychelles are not participating.

Eventually the SADC aims to form a customs union, with a view to later establish a common market, then a monetary union and eventually even introduce a single currency, although that target is still “several years away”, according to the SADC website. “The single biggest challenge in obtaining this, and any of the more advanced economically related integration milestones, is the lack of clarity surrounding the issue of countries with membership of more than one customs union,” states the organisation.

Meanwhile the EAC and Ecowas have also started talking about the pathway from a customs union to a single currency. Labuschagne says that in the end it boils down to the same issue: “If there is political will, it is viable.”