Creating a grand Africa-wide free trade area: overcoming challenges, taking opportunities William Gumede is Associate Professor, School of Governance, University of the Witwatersrand, Johannesburg and Chairperson of the Democracy Works Foundation; and author of South Africa in BRICS: Salvation or Ruination, Tafelberg Introduction African states have set out an ambitious plan to create an Africa-wide free trade area, with duty- and quota-free movements of goods, services and business people by 2016, and an Africa-wide economic and monetary area by 2025. So far 26 African nations have joined up, and the challenge is how to merge the three existing, the Common Market for East and Southern Africa (COMESA) the East African Community (EAC) and the Southern African Development Community (SADC), which are often overlapping, regional trade blocks. Pooling African economies will bring larger economies of scale and markets, thus creating the potential to expand both production and demand. Africa is too fragmented On average, every African country belongs to four or five regional trading blocs, which are overlapping. All these regional groupings have different rules, regulations, membership criteria and are at different stages of integration. These factors could slow the building of a free trade area. Ineffective institutions undermine integration One of the key reasons for the failure of the African integration project so far is weak regional and continental institutions. In some cases the patronage systems at the level of national government have been transported to the regional bodies – undermining these too. The institutional failures in African countries mean that many domestic and national institutions cannot support the complicated and ambitious regional integration commitments; and even if the capacity exists, there is no guarantee that the regional commitments will be honoured. Lack of coherence in protocols, treaties, legal frameworks and policies In terms of regional integration, policies adopted at the regional level to promote regional integration are often contradictory to individual countries’ domestic policies. But continental policies are often also at variance with the policies adopted at the level of regional trade or political blocs. Often individual countries have ignored regional protocols, treaties and legal frameworks. Unfair trade agreements with former colonial powers Most African countries have trade agreements with former colonial powers that often undermine integration with other African countries. The Economic Partnership Agreements (EPAs) with former African, Caribbean and Pacific colonies proposed by the European Union to replace the preferential trade arrangements between the African, Caribbean and Pacific states, which had been operating for three decades before this, is one such example. In terms of the EPAs, the EU has divided Africa into its own regions – which undermine African efforts at integration. The United States African Growth Opportunities Act (AGOA) signs trade arrangements with individual African countries, rather than with regional blocs – which undermines regional integration. US Secretary of State Hillary Clinton has acknowledged that “regional integration has gotten too little attention within the AGOA framework”. Poor infrastructure Poor physical infrastructure, with weak logistics and supply chains, poor power supply and transport networks and limited bank finance to fund infrastructure investment, undermines regional trade in Africa. Infrastructure across the region is either non-existent, inadequate, or not maintained or upgraded. This significantly increases the cost of business for African operators, making it difficult to access markets on the continent. Lack of democracy hampers economic integration Lack of democracy, poor governance and mismanagement is at the heart of all political instability in Africa. These and civil strife on the continent are a huge obstacle to establishing a grand free trade area across Africa. Many African countries have been destabilised by coups and political turmoil and misruled by autocratic governments. Better African leadership and greater democracy are crucial for creating an effective free trade area. Non-trade barriers Non-trade barriers, measures other than tariffs that restrict trade, such as import bans, quotas, technical regulations, permits and levies, export taxes, rules of origin, single-marketing channels, over-bureaucratic customs clearance procedures and travel restrictions, are undermining trade area on the continent. Different regulations in different countries and red tape drive up the cost of business and undermine the idea of a free trade area. The problems with customs unions thus far In June 2009, COMESA launched a customs union on paper, in the form of a trade bloc with a free trade area and common external tariffs. However, in real terms, the customs union is not functioning. Several have not even signed the COMESA free trade area protocols. An EAC customs union was supposed to come into force on 1 January 2010. Issa Sekito, from the Kampala City Traders Association, puts it succinctly: “We are too many years into the customs union and a few miles into the practical application of the required protocols”. An SADC regional customs union that was supposed to be launched in 2010 is still some way off from being a reality. How can the challenges be overcome? Africa need political will to make free trade a reality Lack of political will is undermining the establishment of the African free trade area. For a grand free trade area to work in Africa, African countries will need to cede some of their sovereignty. A big challenge is going to be to set out legally binding mechanisms – and penalties – to get signatories to the free trade area to stay the course. An African free trade area will need effective dispute resolutions to deal with inevitable trade disputes between members. Independent tribunals will have to be set to rule impartially on disputes or disagreements on the interpretation or application of trade rules. Regional industrialisation: diversify one-commodity economies Continent-wide industrialisation should be the ‘overarching objective’ of an African grand free trade zone and the integration initiatives. Most African economies are based on one raw material or agricultural product, which on the face of it means that there is little to trade among themselves. African countries could pool their mining and oil extractive industries – in similar ways that countries in the EU levered off their steel and coal industries – and build regional economies on the beneficiation of these primary products. The challenge is for individual African countries within a grand free trade area to specialise: one country must produce what another country can’t, but needs. To do so, each African country should be required to draft an industrial policy which at its heart should have diversifying from one agricultural product or commodity to value-added products. All the individual country industrial policies must feed into a regional industrial policy. This in turn should be connected to a continent-wide industrial policy for Africa. Eliminate non-trade barriers Non-trade barriers will have to be eliminated if a free trade area is going to work. Similar legislation, technical regulations and custom procedures across countries are vital. There should be penalties for countries that have signed on to the free trade deal but that persist with the implementation of non-tariff barriers. Integrate infrastructure into broader economic development African infrastructure development should be seen as a tool for long-term economic investment that is integral to a country’s industrialisation. Infrastructure development must be linked to ‘other regional economic stimulus measures [to] complement the infrastructure investment and generate synergistic effects’. Regional and continental bodies have divided Africa into infrastructure corridors. However, these corridors are useless and ill-conceived, unless they are underpinned by industrial estates or zones that combine new infrastructure with establishing new firms and plants. The current African regional trade blocs should be transformed into regional economic growth zones or regional zones of industrialisation. Infrastructure, which would include power, transport, telecommunication networks and so on, should be developed within each country, within and between the regional economic growth zones. A continental infrastructure grid should then connect these regional economic growth or industrialisation zones. Bring in the informal sector or the second economy Right now the bulk of regional trade across Africa is in the form of informal traders crossing the borders. A free trade zone among Africans will be useless unless it includes small traders in the informal sectors, who often face formidable bureaucratic barriers. There will have to be uniform standards and specifications across the region to make it easier for the informal sector. All members of African free trade zones must ramp up market support infrastructure for informal traders, in the form of facilities for storage, logistics and communication. African border posts must be made friendlier to informal traders. Closer collaboration between Africa’s development finance institutions and state-owned enterprises African development finance institutions and state-owned enterprises, whether country, regional or continental, must work more closely and more collaboratively to facilitate regional integration. Regional developmental finance institutions such as the African Development Bank, the Industrial Development Corporation (IDC) and the Development Bank of Southern Africa are well equipped to coordinate regional and continental infrastructure development and industrialisation on behalf of African states. African DFIs and SOEs must work more collaboratively. Monetary union: only when strict criteria are met All the three regions committed to a continental-wide Africa free trade area have set targets for setting up regional central banks and adopting a single currency. Not surprisingly, very little progress has been made, beyond setting such targets on paper. Before one can talk of monetary union, African countries will have to establish some semblance of fiscal and monetary discipline. Unless the underlying poor political, economic and social governance in Africa is resolved, a continental common currency may end up with all the vulnerabilities of the worst weakest African currencies. Monetary union will have to be at the end phase of regional integration when the political, economic and non-trade obstacles have been smoothed out. Bring in civil society, communities and citizens African civil society will have to play multiple roles in the regional integration process: as partners providing capacity, representing the poor, and as critics. Given the lack of capacity in many African institutions, civil society has a strategic role to play in strengthened regional integration, through providing ideas, policy alternatives and even as alternative delivery agents. Civil society can also play a role in monitoring whether countries and regions are implementing integration commitments. Currently there are no formal structural processes for civil society organisations to participate in policy formulation in regional and continental integration structures. This needs to be addressed, as it is essential that national civil groups cooperate with their peers at the regional and continental level. Integrate regional and continental educational institutions There will have to be closer cooperation between higher education institutions in the region, in order for the region to use its educational training capacity better. Higher education institutions can assist greatly in effective regional integration. So far, cooperation between higher institutions within regional trade blocs has been weak, diffused and mostly at the level of rhetoric. At present, there is little compatibility among higher education institutions in the regions – with differential levels of resources, different curricula, and different tradition. Research institutions, infrastructure and policies in the different trade regions have been fragmented and uncoordinated, resulting in inefficiencies.
Non-trade barriers... are undermining trade areas on the continent