Countdown to free trade area take-off
Wednesday December 30 2020
Trading under the African Continental Free Trade Area (AfCFTA) is about to begin in just a week’s time. While the Covid-19 crisis has undoubtedly complicated the picture, the East Africa region is actually well-placed to benefit from the AfCFTA.
There are strong reasons for optimism. As a study published jointly by Economic Commission for Africa and Trademark East Africa in March this year shows, the potential gains for East Africa are large — under very conservative assumptions, we calculate for East Africa that the elimination of tariffs alone on intra-African trade will lead to net welfare gains of about $1 billion US dollars, $1.8 billion in additional intra-African exports, and the creation of an additional two million jobs. Add in accompanying measures to reduce non-tariff barriers and additional trade facilitation, and the final benefits are likely to be much larger.
Thus far, it is true that only 6 countries of 14 countries in the wider East Africa region have ratified of the AfCFTA. However, it is not the number of countries that counts but the fact that a regional block of contiguous countries—representing around three quarters of regional GDP—is coalescing. From January 1, 2021, they will all begin the process of a reducing their tariffs—starting with a linear reduction on 90 percent of tariff lines—leading to the elimination of tariffs on intra-regional imports over the course of a decade and a half.
This may seem like a long time frame, but in fact is rapid by global standards — recall that the Free Trade Area of the America’s was under negotiation for over a decade, and never reached a successful conclusion. Moreover, with several national elections recently concluded in the region, it is also reasonable to assume that there will be a flurry of further ratifications early in 2021.
Nonetheless, scepticism is never in short supply, particularly in this era we are living through. Objections to the AfCFTA tend to follow familiar lines: “The lost government revenue will be enormous”; “What will we trade? African countries all trade the same things”; “The AfCFTA is a ‘neo-liberal’ project serving the interests of big corporations”; “It won’t be implemented.” None of these objections stand up to much scrutiny.
Take the issue of tax revenue. Last week, The East African carried a story (reporting our office’s study) talking of a loss of $181 million in tariff revenues for the region. But in the grand scheme of things, the amount of revenues lost due to the elimination of tariffs on intra-African trade is miniscule, for several reasons:
Firstly, because levels of intra-African imports are currently low (on average, for the continent, around 90 percent of imported products come from outside the continent), the amount of tariff revenues foregone will be corresponding low.
Secondly, over recent decades governments in the region have been rapidly diversifying their revenue sources and are no longer so heavily dependent on trade taxes.
Thirdly, the reduction in tariffs will be carried gradually, and won’t be complete until 2033 at the earliest. So there will be no sudden fiscal shock caused by the slow reduction of tariffs on intra-African trade;
Finally, revenue losses will be more than compensated by the increased economic activity under the AfCFTA, through higher internal taxes such as Value Added Tax and Excise Duty.
Andrew Mold is the chief, regional integration and the AfCFTA cluster, UN Economic Commission for Africa