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Africa Free Trade Area offers economic growth

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The African Continental Free Trade Area (AfCFTA) is one of the largest
trading blocs in the world with the majority of African countries now
operating under its preferential trade framework. Trading under AfCFTA
commenced on January 1, 2021 under a liberalized trade regime that would
gradually lead to an integrated continental market with tariffs phased
out on 97% of tariff lines within 10 to 13 years.

AfCFTA covers both goods and services, and provides a platform for
individual countries or regional economic communities (RECs), as
applicable, to engage in intra-African trade, through offers of tariff
concessions and service commitments with reciprocal most-favored-nation
treatment. There is already a degree of liberalized trade and
integration under the eight RECs recognized by the African Union, and
other customs and monetary unions that exist elsewhere on the continent.
To date, it has been reported that 41 countries and the RECs, including
SACU, EAC, CEMAC and ECOWAS, have submitted their tariff offers and
service commitments. Admittedly, the implementation process has been
slower than anticipated, with tariff books still being updated and
administrative procedures getting rolled out.

Negotiations are continuing with respect to how to open up the service
sector. The five prioritized sectors for liberalization within AfCFTA
include business services, communication, financial services, transport
and tourism. The second phase of services liberalization is anticipated
to cover the remaining sectors. By some estimates, services make up
around 60% of total intra-African trade, which is substantial when
viewed in light of the continent’s overall GDP of roughly US$3 trillion.
With Africa’s emerging technological capabilities and limited legacy
infrastructure to phase out, digitally delivered services seem to be the
most logical large-scale expansion opportunity. This would, however,
largely depend on successful negotiations that keep restrictions on
cross-border services to a minimum.

With respect to goods, the sectors that are anticipated to immediately
benefit from trade liberalization include agro-processing, automotives,
pharmaceuticals, textiles, chemicals and mineral beneficiation. Numerous
African economies are highly dependent on exports of raw materials.
Hence, the lack of complimentary products suitable for trade could be an
impediment until new industry develops. Those countries with large and
diversified economies that have manufacturing capabilities are expected
to benefit the most from AfCFTA.

Under the AfCFTA’s rules of origin, which could be product-specific,
preferential trade is extended to goods that have either originated from
or undergone substantial transformation in countries that have ratified
the agreement. The process for identifying products that wholly
originate in the AfCFTA is likely to be straightforward, particularly
for farm products and resources from extractive industries. Products
with more complex supply chains, however, could require extensive
analysis to determine whether they are “sufficiently worked or
processed” within AfCFTA and, if so, whether the whole product or the
incremental value addition would be availed of preferential tariff
rates.

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Intra-African trade has been growing steadily and AfCFTA would simply
accelerate that by removing the trade barriers that have caused the
fragmentation of African economies. It should make basic necessities
more accessible and affordable to the average African consumer by
opening avenues for regional suppliers of processed goods to reach their
target consumers more easily and allow payment options through local
currencies. These features of AfCFTA should encourage industrialization,
and multinationals seeking growth markets may find opportunities to
establish or increase their African footprint.

Any business expansion plan must take a range of factors into account.
At the most basic level, the market and legal framework must be studied
for each country of interest, taking into account such country’s track
record in handling foreign investment and cross-border trade. In
addition, the degree of commercial presence required as a condition of
market access must be assessed, along with the permits and registrations
to be procured for each activity. Domestic laws are implicated in much
of the detail set forth in the AfCFTA agreement, and the regulatory
framework for a particular activity could be drastically different from
jurisdiction to jurisdiction.

With respect to goods, while it is theoretically possible to set up
operations in a few key jurisdictions and sell throughout the bloc,
non-tariff trade barriers (NTBs) and measures that participating
countries could take to protect local industry might cause disruptions
to remote selling activities. Examples of NTBs recently implemented by
some African countries include border closures, denial of permits and
imposition of special taxes in the form of surcharges on imported
products. While there may be valid reasons for taking such measures, any
interruption to market dynamics could have serious consequences for an
exporting enterprise. For that reason alone, establishing business
operations in a large market that can absorb a significant amount of
production would mitigate risk and, if combined with a well-developed
transportation network that can reach potential satellite markets, it
could be the ideal growth platform.

Local presence brings with it more commitments and higher costs of doing
business. Footprint could be managed via ready-to-use industrial parks
and special zones, which may provide easy access to major roads, onsite
“one-stop” administrative capabilities to handle basic regulatory and
procedural matters, and tax and customs deferral until products are
introduced into the local market or exported. The incentives offered by
African countries vary widely, such as multi-year income tax exemptions
based on the industry involved, location-specific tax reductions or
reciprocal low-tax-rate arrangements under REC agreements.

There is no single magic formula for operating under the AfCFTA
agreement as its framework is layered onto existing trade relationships,
and the manner of its application depends on the type of business
activity involved and the arrangements among the countries that are
implicated in a particular transaction. As a practical matter, low
tariff rates are not the sole driver of business decisions. The
profitability of any endeavor depends on many factors, commercial and
otherwise, and AfCFTA’s value proposition lies in the incremental
benefits it offers to enhance long-term value creation for goods and
services to be traded in new markets.

Baker Mckenzie Africa specialist in the New York office, Pomy
Ketema.

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