• Monday, July 22, 2024
businessday logo

BusinessDay

The concept of Africa Continental Free Trade Area (AfCFTA)

The concept of Africa Continental Free Trade Area (AfCFTA)

What is this concept?

It is not a new concept. It is actually a first step in a process of regional integration where countries come together to give preference to themselves with reference to trade, investment, and any other areas in which they agree to cooperate. This concept can be traced to Jacob Viner’s book, ‘Customs Union’, in which he argues that countries that come together to form an economic bloc will lead to the expansion of trade among themselves by diverting trade with others outside the agreed jurisdiction to only among themselves.

The first step is when countries are together. We are not going to be charging ourselves import duty; therefore, we can charge countries outside our jurisdiction as much as we want but not charge ourselves import duty. Free trade areas are governed by this kind of agreement. This is actually the concept of a free trade area. The second is the customs union. When we agree that we will all charge the jurisdictions outside our agreed area, it will be uniform, but on our own, we will not be charging ourselves anything. This means we will not be charging ourselves. This means the cost of any given product among all member countries will be the same. The third phase is when we develop among ourselves a common market, i.e., the policies on agriculture, industry, investment, and trade will all be unified. These countries are operating in a common space in terms of policies. The final phase is economic union, which means we have policies in place and, together, we also have a single currency. Economic integration is a progression from free trade areas to common customs duties, common policies, and common currency.

The trade-in services

How can services be tradeable? In this case, in the same way goods are traded, a mutual recognition agreement can be reached. That means we allow service providers in these countries to move their services across borders without any hindrance. My opinion is that people are not aware of how services can be traded. Under modes, we can also have mutual recognition agreements in which, for services to cross borders, your qualifications must be recognised in the country you want to trade your services within for goods that require import duty. In services, it is a question of mode, mutual recognition, and the commitments made.

We shall trade among ourselves using our domestic currencies; for instance, if I trade in Kenya, I am debited in Naira, but my Kenyan customer is paid in Kenyan Shillings. That way, sellers conserve foreign currencies for trade outside Africa, but for trading within Africa, it is with local currency; this is the Pan-African Payment System. That is the essence of the Free Trade Area; this kind of arrangement is not new, and this is just a first step towards economic integration. For instance, the Ecowas free trade area is called the Ecowas trade liberalisation scheme. This is not a free trade agreement; this is a technical concept that cannot be modified in any way; once it is changed, it becomes something else. The volume of trade among African countries is between 12 and 14 percent; with this arrangement, it will increase to 25 percent. When Nigeria hesitated to sign, it was clearly a wrong step because the proliferation of foreign companies within the region simply meant that they were positioning themselves within the Free Trade Area, so they will trade with Nigeria anyway. It can be argued that foreign companies are within the free trade area and can trade based on the agreements. Nigeria needs to settle its infrastructural problems to make it easy for Nigeria to attract these companies to come into the country. The infrastructure is now of major urgency for Nigeria. Our monetary policies are not encouraging.

Substantial volumes of money are outside the banking system. It is foolhardy to apply traditional monetary theory because it only affects money in the bank and ultimately punishes the private sector that is going to the bank to borrow money. The cost of money will continue to increase. Whereas, you need to apply moral persuasion to convince people to return their money to the bank. It will help reduce the interest rate.

Who can play in this area? People are not aware they can trade in services. It is also called invisible trade, such as trading in education. I can send my services across borders without going there physically. That is mode 1. You can have, say, training here, and people will come and enjoy your services here also; that is mode 2. Set up a branch outside the country; that is mode 3. You can send your staff to go and provide the service in the country and return; that is mode 4. There must be an agreement with the professional organisations, and the country must have accepted that your service (within your sector) can enjoy market access. The certificate must be recognised across the borders where you want to trade. Many businesses are limited to areas that are saturated, whereas the continent is wide and open.

How is Nigeria faring so far?

Nigeria was late to sign to join AfCFTA; we only signed on July 7, 2019, at the meetings of Heads of State, which were held in Niger and ratified in December 2020, whereas 22 countries (which is the minimum number) had ratified, which means AfCFTA had started before we started, as most signed in March 2018. This started without Nigeria, which means we were not eligible to apply to host the headquarters, nor could we present a candidate to lead as Secretary General. Nigerians were not even eligible to work in the secretariat, as were latecomers to AfCFTA! On October 22, 2022, eight countries started the GTI, or Guided Trade Initiative, to test run AfCFTA in Rwanda, Ghana, South Africa, and five others because we have not joined here. Countries are currently testing the workability of AfCFTA among themselves without Nigeria.

When you enter economic integration late, you only take what is available. On April 30, this year, Nigeria made an attempt to join the Guided Trade Initiative (GTI), but I understand the President indicated his interest in being present, but he was away at the time, so it was postponed. Nigeria is still pending. Despite the huge potential AfCFTA holds for Nigeria and its huge demographic assets, we were late to sign, late to ratify, and late to join the Guided Trade Initiative, and that’s the intangible preparedness. The state of our infrastructure is a completely new story. The roads, the ports, the power situation, and all the agencies in the trade facilitation ecosystem need to begin to plan futuristically. The urgency of reform and investment in infrastructure is one way to ensure Nigeria benefits from AfCFTA. Knowledge is key here. Do our leaders know how much the country can earn from trading among 1.6 billion Africans? Only two countries in Africa do not import fuel; that is huge potential to export, but with this state of play. Something needs to change urgently!

Professor Jonathan Aremu Professor of International Economic Relations & Member National Action Committee AfCFTA.