How should firms leverage the AfCFTA?
According to UNECA & AU (2020), when trading commences under the AfCFTA on 1 Jan 2021, 90 per cent of traded goods would enjoy tariff reduction in equal annual instalments over five years for non-LDCs, and ten years for LDCs. Six countries, namely, Ethiopia, Madagascar, Malawi, Sudan, Zambia and Zimbabwe, would, however, be allowed to reduce tariffs on 90 per cent of traded goods over a 15-year window. Tariffs on an additional seven per cent of traded goods considered to be “sensitive” would also decline, but over a longer period of 10 years for non-LDCs and 13 years for LDCs. The remaining three per cent of so-called ‘excluded’ products are to be exempt from tariff reduction and eventual elimination to provide member countries with some wiggle room; albeit these products would be subject to a review process every five years.
Longsuffering pan-African firms (PAFs) and multinational companies (MNCs) should be delighted by these terms. Hitherto, they contended with various holdups at borders and arbitrary duties on traded goods. A future in which they can trade in goods and services on the continent tariff-free, and move personnel between countries without onerous visa arrangements, would be a boon. As many trade barriers are non-tariff related, the online site (https://tradebarriers.africa/home) by the AfCFTA secretariat to manage and rectify non-tariff barrier complaints is likely to boost confidence in the business community. However, similar tariff-free trade in services is yet to appear. In the initial negotiations for services, five sectors will receive priority: business services, communication services, financial services, tourism & travel related services and transport services. Negotiations on other service sectors will follow only much later.
After the rules of origin are finalised and published, international firms and investors will understand the levels of value-addition that would deem goods and services to have originated from an AfCFTA country. Final rules of origin should incentivise global firms to partner with their African counterparts and integrate their regional and global value chains. “As of September 2019, 90 per cent of the work on Rules of Origin was complete, with the Niamey African Union Summit directing negotiators to submit final schedules of outstanding Rules of Origin to the February 2020 session of the Assembly of the African Union (UNECA & AU, 2020).” Hopefully, all outstanding Phase 1 issues will be finalised well before the 1 Jan 2021 commencement date.
The Covid-19 pandemic created an imperative for “building more resilient GVCs”. In this respect, global firms actively seek to reduce supply chain reliance on China, after their vulnerability was writ large as China closed its borders and shut down to contain the coronavirus. The World Bank believes “between 16 and 26 per cent of global exports are expected to move to different countries in the next five years.” Asian nations such as Vietnam and Bangladesh are already beneficiaries of this strategic shift.
Industrialisation in Africa needs to focus not only on manufacturing production, but also on having a development strategy for the service sector
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The World Bank sees the AfCFTA as providing African countries opportunities to tap into the global shift away from “Factory China,” especially in the textile and apparel GVCs. The IMF corroborates this sentiment. According to the IMF, the Covid-19 crisis will “prompt a significant reorganisation of global value chains, underscoring the potential of the African Continental Free Trade Area as an engine for the development of regional trade.” Thus, AfCFTA is a potentially game-changing framework that “would not only reduce Africa’s vulnerability to global disruptions, but would boost regional competition and productivity, and promote food security (IMF, 2020).” However, “to succeed in GVCs, African countries need to reform the service sector to improve access, reduce cost and improve quality. In other words, “industrialisation in Africa needs to focus not only on manufacturing production, but also on having a development strategy for the service sector,” according to the World Bank.
Gopaldas (2020) identifies agriculture, construction, retail and transport sectors as potential medium-term winners due to the AfCFTA. Tariff-free trading of agricultural produce would bring down costs, allowing farmers to entertain ambitions beyond their national borders. This benefit would lead to lower costs for products that rely on agricultural inputs. As much of the potential gains from the AfCFTA are heavily dependent on infrastructural linkages (road, rail, and air), the construction sector should enjoy an immediate to medium-term boom on the back of the trade pact. With pan-African retailers finally rid of the punishing tariffs that weigh significantly on their margins, intra-African trade should increase. The logistics involved in meeting these expectations would also buoy the transport sector. In light of the above, how should firms position themselves to seize the AfCFTA opportunity? We adapt the Hambrick & Fredrickson (2005) strategy diamond framework to suggest how firms could proceed.
The strategy diamond framework poses five fundamental questions. Combining the answers reveals the selected strategy. These overlapping questions are:
· Arenas: Where will we be active?
· Vehicles: How will we get there?
· Differentiators: How will we win in the marketplace?
· Staging: What will be our speed and sequence of moves?
· Economic logic: How will we obtain our returns?
A firm seeking to leverage the AfCFTA can use the strategy diamond framework to work out how to go about it. Arenas, vehicles, and staging are immediately resonant issues in this regard. To be more fit-for-purpose, we focus on only those three elements:
· Arenas: In which countries and sectors should firms be active?
· Vehicles: What should firms do to succeed in their chosen markets and sectors?
· Staging: What should be the pace and sequence of firm operations in their chosen markets and sectors?
Clearly, these questions are pertinent for a firm seeking to leverage on the AfCFTA, and demand robust answers. Bear in mind, many firms that would be excited about the AfCFTA are likely PAFs (pan-African firms) or MNCs currently operating on the continent. Some Micro, Small & Medium Enterprises (MSMEs) will pursue niche opportunities. Admittedly, some local and foreign firms may decide to expand into the continent based primarily on the AfCFTA. Irrespective of their motives, each of the three types of firms would likely grapple with the same three questions.
Firms must first decide on which countries provide the correct balance of risks and rewards. After deciding on the countries (and sectors) of interest, firms must then decide on whether to venture alone, to expand organically via Greenfield investments, to merge with, or to acquire local firms. In view of the slow pace of AfCFTA negotiations, with outstanding Phase 1 issues still in the works, and Phase 2 negotiations far down the road, the speed and sequencing of moves may make a difference between phenomenal success and abject failure.
Article was first published by the NTU-SBF Centre for African Studies at Nanyang Business School, Singapore. Figures, tables, & references are in orginal article viz. https://nbs.ntu.edu.sg/Research/ResearchCentres/CAS/Publications/Documents/NTU-SBF%20CAS%20ACI%20Vol.%202020-39.pdf
