The Tripartite: what to expect from Africa’s grand free trade area Matthias Bauer is a Senior Economist at the European Centre for International Political Economy (ECIPE), and Andreas Freytag is a Senior Fellow of ECIPE and a Professor of Economics at the Friedrich-Schiller-University Jena and Honorary Professor at the University of Stellenbosch Regional values chains help Africa to become less dependent on the rest of the world both in terms of imports and in terms of business cycle dependencies. This is particularly important for commodity driven economies. Since commodity prices and foreign investment in extractive industries are always volatile, commodity sectors cannot provide continuous support for African economic growth and economic diversification. Rising levels of intra-regional trade can become a powerful force of economic and societal transformation. Time and again through modern history, countries have begun a process of economic development by stepping into cross-border trade and investment. Thereby regional integration is not an end in itself; it is the driver for long-term prosperity and a socially inclusive society. On 25 October 2014, the Tripartite Sectoral Ministerial Committee (TSMC) paved the way for the largest projected free trade agreement the world has seen so far. The free trade area is bigger, by population, than either the European Union (EU) or the North Atlantic Free Trade Area (NAFTA). The announcement was made by the TSMC in Bujumbura, Burundi, and African heads of state finally signed off the agreement in June 2015 in Egypt. The so-called Tripartite Free Trade Agreement (T-FTA, Tripartite) encompasses 26 states from the Common Market for Eastern and Southern Africa (COMESA), East African Community (EAC) and the Southern African Development Community (SADC). The economic block consists of a combined population of 625 million people and a GDP of 1.3 trillion USD. If the Tripartite were successfully implemented, free trade would be possible in an area accounting for half of the membership of the African Union (AU) and around 60 per cent of the continent’s total economic output. Moreover, if the Tripartite proves to be successful, it would be followed by a continental customs union starting in 2019, as it is outlined by the AU’s ambitious road map for a continental free trade area. Yet, here is the problem: despite innumerable ambitious efforts for pan-African economic integration, the African continent still is highly fragmented. Market fragmentation in terms of different tariff lines, complex systems of rules of origin (ROO’s), and technical barriers to trade prevent enormous opportunities for cross-border trade, the expansion of business activity and economic development from being exploited. Keeping in mind that Africa’s integration efforts were always characterised by ambitious schemes and weak implementation at the same time, it is legitimate to ask about the real merits of a Tripartite agreement. Africa’s landscape of economic integration: ineffective overlaps Over the past decade Africa has experienced robust and continuous economic growth. Between 1980 and the end of the 1990s, Africa’s average growth rate was lower than the growth rate of the world economy. Since the turn of the millennium, however, the African economy outperformed the word economy by two percentage points on average. Drawing on this performance, many observers felt inclined to praise the continent for its achievements. A few optimists even proclaimed the longingly expected turning point in Africa’s development history. Despite this favourable macroeconomic performance over the past 10 to 15 years, many African economies are still grappling with serious development challenges ranging from food insecurity, high joblessness, poverty and inequality to commodity dependence, dependence on foreign aid, slow economic transformation, and low integration of the continent in the global economy’s value chains. For many African economies, intra-regional economic integration has merely been a weak driver of economic and social development. In fact, recent economic growth was primarily supported by more stable political environments (except parts of Northern Africa), favourable commodity prices (until the burst of the so-called commodity super-cycle), stronger economic cooperation with emerging economies like China and Brazil, and higher official development assistance since the turn of the millennium. The level of intra-African trade, however, stands at around 10 per cent, which is the lowest among the major regions of the world, including emerging Asia. Evidence suggests that regional integration in Africa is therefore far below potential. Adding up informal trade, which is indeed high relative to officially recorded numbers, would not change the picture. In fact Africa has integrated with the rest of the world faster than with itself. In other words, with a few exceptions, Africa still mainly produces what it does not consume and it consumes what it does not produce. This is bad for both economic efficiency and social equality. Many Africans are in fact prevented from earning a living in serving local markets across their own borders. This is different to what African heads of state had in mind when setting up the African Economic Community (AEC) at the beginning of the 1990’s. Following the letters of the Abuja Treaty establishing the AEC, which was signed in 1991, the African continent would be fully economically and politically integrated by 2028. From 1994 onwards, the treaty foresees a transition period of 34 years and six stages until Africa would arrive at a single African market (until 2019), a pan-African monetary union, an African central bank and African currency, and a pan-African parliament. After the end of colonialism, several initiatives of African economic integration have been pushed forward, with tariff liberalisation being at the core of African countries’ integration efforts. Due to African nation’s colonial legacy, many African leaders soon recognised regional integration a necessity in order to overcome the continent’s economic and political fragmentation, and to secure Africa’s long-term economic and political future. The outcome was the establishment of the Organisation of African Unity (OAU) in 1963, which was replaced by the African Union in 2002. Based on the objectives of the OAU Charter – the OAU’s basic constitutional document – African leaders held various summits to push for further regional integration. They committed themselves to promote economic and social development by establishing several regional and sub-regional institutions, which are the backbone and working base of Africa’s integration policies today. As a consequence, the AEC provides a framework for continental integration that is different from other continents’ integration efforts. In fact, Africa’s multiple integration approaches are based on several Regional Economic Communities (REC’s), which constitute the main building blocs towards the full realisation of the AEC. On current trend, many African countries belong to more than one regional integration organisation. 17 regional integration agreements are currently in place, 8 of which are officially recognised by the African Union as REC for the purpose of achieving greater economic integration. Amongst them: COMESA, EAC and SADC. The high number of preferential trade agreements (PTA’s), which include Africa’s REC’s, goes along with the duplication of functions and a substantial overlap within the groupings. According to the World Trade Organisation, in 2010 the 58 African countries were members in 55 preferential trade agreements of which 24 were intra-regional PTA’s. From a political perspective, overlapping membership in different REC’s is judged controversially. On the one hand, multiple membership is often regarded as a practical constraint to advancing Africa’s ambitious integration programme. On the other hand, many observers refer to the peacekeeping effect of Africa’s multiple REC’s. Following the latter perspective, multiple membership reduces the probability of war by increasing the opportunity cost of military conflicts and by building mutual trust as partners tend to know each other better. Besides, the presence of functioning formal institutions is argued to ensure that the regional relationships have a real meaning and are not pursued on a non-binding ad hoc basis only. Although evidence suggests that Africa’s REC’s have contributed to peace and security in the region, their economic integration track record remained poor. The history of economic integration in Africa was always marked by comprehensive schemes and ambitious formal obligations, but weak legal and institutional enforcement. The most fundamental problem is the substantial lack of serious political commitment to cutting tariffs and tearing down non-tariff barriers. Problems in different policy spheres make reforms urgently needed Although much of West Africa is not covered by the Tripartite agreement, it aims to consolidate three considerable economic communities. From an economics perspective, the amalgamation of African REC’s would clearly be beneficial: multiple overlapping PTA’s pose a significant administrative cost burden on firms that are engaged in cross border commerce. In addition, consolidating Africa’s existing REC’s would allow for a swifter implementation of integration measures since it becomes more attractive for governments to counteract burdensome bureaucratic tendencies at national level. Yet, despite the existence of eight official REC’s, achieving deeper economic integration across the continent has been remarkably slow in the past. The agreements made generally show a poor implementation record, which can be attributed to the unwillingness or inability of African governments to effectively cede sovereignty to supra-national levels. A few facts shall illustrate the region’s desolate status quo. We begin with the trading environment. Borders, as measured by the World Bank, are extremely thick in Africa. First, there are enormous gaps in the infrastructure. Many countries are landlocked and roads are not well maintained, if they are paved at all. The quality of airports and ports is comparably poor. Southern Africa stands out a bit, but still many Tripartite countries perform poorly in the World Bank’s most recent Logistics Performance Index. The index provides data for 166 countries worldwide and covers categories like customs procedures, infrastructure availability and timeliness of delivery. The numbers show that the Tripartite region is a highly diverse group of countries. In the aggregate index, the worst performers are the Democratic Republic of Congo (rank 159), Eritrea (156), Djibuti (154), Sudan (153), and Mozambique (147). South Africa (34) and Egypt (62) score comparatively well. Second and related, the numbers for time to trade, a standard measure indicating various barriers for businesses to move goods between countries, vividly demonstrate the challenges for businesses that are engaged in intra-African trade. The average time to export is 50 days for Eritrea, 44 days for Ethiopia, 44 days for the Democratic Republic of Congo and 32 days for Burundi. For Egypt and South Africa, which are not landlocked however, the numbers are 12 and 16 days respectively. By comparison, for sub-Saharan Africa it takes on average 38 days to import and 32 days to export goods across borders. For Northern African countries, most of them coastal states, it takes on average 24 days to import and 20 days to export. As concerns customs procedures, the number of documents required to import is 10 for Egypt and 6 for South Africa. The equivalent numbers are 12 for Eritrea and Malawi and 11 for Tanzania, Ethiopia and Mali. In addition to these administrative hurdles, many businesses complain about corruption at border posts. Often it seems necessary to bribe the customs officers in order to get the papers approved. Third, there are numerous general regulatory difficulties. First, many regulated network industries do not deliver punctual and price-worthy services. This applies for postal services, telecommunications and electricity. In addition, one can observe a variety of complex country-specific regulations. These may often be justified economically, but have their fundament in vested interests, too. Ideally, these regulations should be mutually accepted; this, however, seems enormously ambitious. Finally, there are various regulatory provisions at national as well as REC level that significantly affect the functioning of Africa’s REC’s and its two existing customs unions. These regulations, however, require much more intense negotiations. A prominent example is Rules of Origin. ROO’s represent often substantial technical barriers to trade. Complex systems of national and regional ROO’s considerably prevent African businesses from the benefits of the preferential trade concessions made in the REC’s constituting the Tripartite. Local content requirements, however designed, dramatically reduce any company’s incentives to trade across borders. For products like wheat flour, where ROO’s have been most contentious, preferential trade is often effectively prohibited because governments want to protect domestic producers. This is also true for manufactured products for which common ROO’s have in many cases not been specified. Additional costs arise from the administrative burden African businesses face when required to provide certificates of origin. According to the World Bank, ‘Woolworths does not use SADC preferences at all in sending regionally produced consignments of food and clothing to its franchise stores in SADC markets. Instead it simply pays full tariffs because the process of administering ROO documentation is too costly.’ The additional burden can account for almost half the value of product-specific duty preferences. The magnitude of the burden, however, must always been seen with the size of the delivery. Small and medium-sized enterprises, the backbone of both developed and developing countries, suffer most from excessive administrative requirements. Taken together, these barriers send a clear message: the current degree of openness and the lack of willingness of African governments to allow for foreign competition that might threaten domestic firms is limited in Africa. This leads to the conclusion that these problems may well constitute major obstacles for successful Tripartite negotiations. Can the Tripartite deliver? So the question is indeed whether Tripartite negotiations will lead to a success. Negotiations will take place in two phases: in phase one, negotiators will deal with the liberalisation of trade in goods, mainly pushing for the removal of tariffs, but also for non-tariff barriers, and they are working on the liberalisation of the free movement of business people. In phase two, they will tackle the gradual liberalisation of trade in services such as transport, telecommunication and the digital economy. According to official declarations, the majority of the Tripartite’s designated member states already made ambitious tariff offers and they agreed on an interim solution for ROO’s while work continues on product specific rules of origin (PSRO). It is not clear how the outcome will actually look like. EAC and COMESA apply very similar ROO frameworks. SADC, however, uses a fundamentally different structure. Given that up to 56 per cent of ROO’s are different across the three REC’s that constitute the Tripartite, it is unlikely that member states agree on a proper level playing field soon. Contrary to financial resource-intensive infrastructure projects, which are also being debated among the group of 26, the elimination of different ROO regimes is cheap. Harmonised ROO’s would be an extremely important precondition for the creation of lasting intra-African value chains. It is therefore crucial that member states arrive at the full harmonisation of differential ROO’s. A true level playing field is likely to facilitate unprecedented levels of inter-regional trade, business activity and employment. If African economies want to become less dependent from the rest of the world in terms of imports and business cycle dependencies, it is essential for African leaders to push for more inter-African integration. For Africa in particular, regional integration is a precondition for enhancing economic diversity, economic opportunities, domestic and regional inclusion, and finally, peace. In order to exploit the full potential for both the Tripartite and the rest of the continent, heads of state must strive for Africa’s first deep FTA – an FTA that does not fall short of the political ambitions attached to it.

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If African economies want to become less dependent from the rest of the world in terms of imports and business cycle dependencies, is essential for African leaders to push for more inner-African integration

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