Africa’s TFTA: An Exercise in Economic Integration
The Tripartite Free Trade Area (TFTA) was launched on 10 June 2015 in Egypt when the representatives of 26 governments accepted the tenets of the free trade area. This created the largest free-trade zone in Africa, reaching from Egypt to South Africa (BBC, 2015). This article will investigate the TFTA, its challenges and benefits to Africa, and how it will manifest in the larger global context.
Free trade agreements (FTAs) are negotiated so that countries and businesses can benefit from international economic integration and the subsequent eradication of barriers to trade. FTAs create a bigger market, increase competition, but at the same time reward economies of scale, which in turn requires the efficient use of time and resources. The increased competition can stimulate economic reforms, such as the accelerated adoption of existing technologies and stimulation of the development of new ones (Krist & Hughes, 2012).
Historical Development of the TFTA
The TFTA is part of an overarching project to economically integrate all the countries on the African continent. It could also be a major step towards the creation of a pan-continental free trade area in 2017 or later (Zamfir, 2015). As such, it will likely be a major factor in Africa’s development, both economically and politically.
The reality is that economic integration in Africa is not new. Several bodies have existed in Africa to foster regional economic integration: the Southern African Development Community (SADC), the East African Community (EAC), the Common Market for Eastern and Southern Africa (COMESA), the Inter-Governmental Authority on Development (IGAD), the Economic Community of West African States (ECOWAS), the Community of Sahel-Saharan States (CEN-SAD), the Economic Community of Central African States (ECCAS), and the Arab Maghreb Union (UMA) (Disparte & Bugnacki, 2015). These bodies have all been functioning at various levels of efficiency, with the EAC probably being the most efficient and the most advanced en route to an economic union.
The TFTA has its roots in the Abuja Treaty on the Establishment of an African Economic Community (1994), which provided a detailed roadmap for economic integration in Africa. Until now, transnational economic integration in Africa has mainly taken place at the level of African regional economic communities (RECs), which is in line with this roadmap. The African Union (AU) has recognised eight such RECs (identified above), often with overlapping memberships, as pillars of economic integration. The TFTA can be seen as an inter-REC integration initiative, launched independently of the framework of the AU, but embraced by it as a step towards linking the gap between regional and continental integration efforts, and encouraging the establishment of a continental free trade area (CFTA) (Zamfir, 2015).The TFTA itself was initiated in 2005. The first Tripartite Summit in Kampala, Uganda on 22 October 2008, was attended by the governments of the participating states. Here they agreed on a programme to harmonise trade rules between the RECs (Anyanzwa, 2014). A second summit in 2011 endorsed a project to launch the TFTA (Zamfir, 2015).
The TFTA itself was initiated in 2005. The first Tripartite Summit in Kampala, Uganda on 22 October 2008, was attended by the governments of the participating states. Here they agreed on a programme to harmonise trade rules between the RECs (Anyanzwa, 2014). A second summit in 2011 endorsed a project to launch the TFTA (Zamfir, 2015).
It was generally expected that the TFTA would kick off in December 2014 in Egypt. However, South Africa, a key member of the SADC, pulled out citing inadequate consultations on contentious issues, such as tariff offers and rules of origin. It was suggested at the time that South Africa seemed to have developed cold feet on the TFTA, fearing that the TFTA would open up its market to intense competition from its regional counterparts (Anyanzwa, 2014).
The TFTA includes three of the existing economic communities in Africa, i.e. SADC, EAC, and COMESA. These three RECs have achieved different degrees of integration (Zamfir, 2015), which does provide for a degree of complexity that will make future operations more difficult to manage.
Once ratified (which has to be done by 2017), the TFTA will consist of an impressive 26 countries, a population of 632 million, an area of 17.3 million square kilometres, total trade of US$1.2 trillion, and 60% of Africa’s output (Disparte & Bugnacki, 2015).
Goals and Objectives of the TFTA
The general objectives of the TFTA include rapid socio-economic development in the region, the creation of a large single market with free movement of goods, services, and business people, and eventually a customs union, as well as the resolution of the challenges posed by multiple memberships of RECs. The specific objectives listed in the draft agreement include, in the first place, the elimination of all tariffs and non-tariff barriers to trade. The promotion of trade in services would follow a more gradual approach, based on defining priority sectors for liberalisation and putting in place a progressive services-liberalisation programme (Zamfir, 2015).
Other objectives go beyond trade and include the promotion of investments and the mobility of business people (including foreign nationals residing in a TFTA member state), the cooperation on infrastructure development, and the promotion of an equitable society and social justice. Lastly, goods would be eligible for preferential treatment if they originate in any of the TFTA member states (Zamfir, 2015).
In spite of only existing of three of Africa’s RECs, which could be seen as a major shortcoming, the TFTA does provide for bringing in the Central and West African nations, that are currently excluded from the agreement, at a later date. This would create an even larger free trade zone across Africa (Disparte & Bugnacki, 2015), and enhance the efficiency of economic integration in Africa.
Economic integration is one of the five priorities of Akinwumi Adesina, the president of the African Development Bank (AfDB), i.e. “Integrate Africa”. It addresses the fragmentation of African economies, and will be key to driving industrialization, another of Adesina’s priorities. With Africa’s share of global trade currently at 3%, regional value chains are seen as a stepping stone for growth through a strategic integration into global value chains (Adesina, 2016). To that end, the TFTA will certainly give this process a boost.
Implementing the TFTA
According to Zamfir (2015), the TFTA is based on three main pillars – market integration, infrastructure development and industrial development. The trade negotiations included two phases: in the first phase, they will deal with the liberalisation of trade in goods, by removing tariff and non-tariff barriers, and with ensuring the free movement of business people; the gradual liberalisation of trade in services will be addressed in a second phase (Zamfir, 2015).
While the TFTA’s size may present some advantages, its key economic centres are separated by long distances, an obstacle often exacerbated by poor infrastructure, inefficient logistics, and cumbersome customs procedures. To achieve its objectives, the TFTA must enhance the connectivity and linkages among member states. This requires not just the elimination of all significant trade barriers, but also the facilitation of trade through physical and institutional infrastructure (Andriamananjara, 2015).
Intra-African trade currently only forms 12% of Africa’s trade. It is widely hoped that the TFTA would at least increase this figure to 30%, still relatively modest when compared to Europe, which shows 70% of their trade is within the continent (BBC, 2015). But, in all fairness to Africa, the development paths of Europe and Africa have been vastly different.
The poor state of Africa’s transportation infrastructure does hamper intra-African trade, and should take the blame for the measly 12%. The AfDB estimates that the region requires $95bn in annual investment in infrastructure to meet current needs, of which only about half is funded. Successfully addressing the transport infrastructure would be a major issue for the TFTA (Toesland, 2015).
The TFTA would in all probability benefit those countries with a proven comparative advantage in food and light manufacturing the most, at least in the short run. In the long run, however, the winners will be those countries that know how to harness the trade preferences provided by the TFTA (Toesland, 2015).
While the agreement has been signed, countries in the TFTA can still choose to omit large portions of their tariff schedules from full liberalisation. In some cases, as much as 40% can be excluded (Toesland, 2015). The logic behind this step is to provide member countries with some sort of protection against stronger competitors in Africa.
Challenges for the TFTA
Implementing the TFTA is not going to be easy. Given the size of Africa, the vast differences between the countries (26 currently) in terms of size and development, size and strength of economies, and strength of currencies, one could expect quite a number of challenges that will need to be addressed for the TFTA to have any meaningful impact.
Disparte & Bugnacki (2015) have identified a number of challenges for a successful TFTA. Firstly, a massive scale of effort is required as 75% of the 26 countries need to approve it. These states represent drastically diverse economies and regulatory regimes, all of which need to be bound together.
Secondly, the inertia of the status quo is problematic. The larger, more advanced economies of Africa possess industries and companies that would probably displace or absorb those of the smaller states in Africa. The TFTA could therefore create large-scale economic disruption in the short-term, especially true for states with small economies that currently produce few exportable goods. It could lead to beggar-thy-neighbour policies that will not only set the TFTA back, but also lead to wider regional instability, job losses, and resource crises.
A third challenge is the existence of non-tariff barriers to trade (NTBs).
A fourth challenge is the lack of infrastructure. In spite of its constraining effect, it is hoped that the TFTA will lead to much-needed infrastructure developments, including interconnected systems of roads, bridges, airports, and internet and electricity networks.
The lack of an enforcement entity has up to now undermined the effective functioning of the EAC, SADC, and COMESA. It will also be problematic for the TFTA.
Zamfir (2015) identified a number of additional challenges. There are obstacles of a structural nature, which apply in the case of the proposed TFTA as well. For Africa to benefit in a meaningful way from the TFTA, there would need to be a significant increase in the diversification of production. Should this not happen, Africa would only be pushing around poverty amongst its economies.
In 2012, the AU identified an additional series of obstacles to trade, including restrictive customs procedures, administrative and technical barriers; limitations in productive capacity; inadequacies of trade-related infrastructure, trade finance, and trade information; lack of market integration; and inadequate focus on internal market issues. Cumbersome administrative procedures and corrupt customs officials are also among the main obstacles hindering trade (Zamfir, 2015).
There are fears that the real big winners will be multinational corporations from outside Africa that have settled in big cities and would be provided with easy access to a multitude of markets. Another major problem that has not been dealt with yet, is the potential loss of revenue for governments, as customs duties are a major source of government revenue (Zamfir, 2015).
Another important issue is whether the TFTA will also benefit small, informal traders. Informal cross-border trade has a significant share of trade on the African continent. In the case of the SADC, it is estimated to represent 30 to 40% of total intra-regional trade. However, so far the negotiations on the TFTA have not covered the issue of informal cross-border trade (Zamfir, 2015).
The most important challenge for the TFTA could, however, be implementation itself. Governments could drag their feet on implementing the agreements, as they have already done with the TFTA launch. They may not be effective enough in removing the multiple barriers to trade in the region, or might even maintain them or institute new ones in order to protect their producers. (Zamfir, 2015). Hopefully governments in Africa can be convinced that implementing the TFTA as soon as possible will work in their favour, and that the benefits far outweigh the negatives.
Benefits of the TFTA
Having addressed the extensive challenges facing the TFTA, one might be inclined to walk away, stating the many problems facing the successful implementation of the TFTA. However, there are too many benefits to be derived from a successful TFTA to ignore it.
Larger markets provide for the potential of more cost-effective manufacturing. The consolidation of financing would be another benefit of the TFTA. Larger investors will lead to the liberalisation of the financing sector, greater access to finance and more investors coming to Africa (BBC, 2015). These are formidable benefits that will stand Africa in good stead in its future development.
The TFTA would in essence ease the movement of goods, services and people across Africa. It would benefit the member states, foreign investors, and African citizens by more readily harnessing the potential of the continent’s people, both as a labour force and as a rapidly growing consumer base (Disparte & Bugnacki, 2015).
Zamfir (2015) referred to the increase in trade among the countries involved, some diversion of trade with the rest of the world towards intra-TFTA trade and, most importantly, gains to consumers, as they get access to cheaper and better quality products. A study in 2011 by the UN Economic Commission for Africa (UNECA), found that there would be general welfare gains as a result of the establishment of the TFTA.
Another important benefit would be the increase in industrial production, as aggregate demand in the region will rise and industrial production will realign between countries. This would be dependent on the diversification of Africa’s economies from being commodity-export driven to manufacturing and production driven.
According to Zamfir (2015), the TFTA would also generate new opportunities for businesses through an improved and harmonised trade regime that would bring down their operating costs, while further benefitting from an inflow of FDI into the region. The TFTA would speed up economic growth in African countries and permit them to implement a regional integration strategy that prioritises infrastructure development.
The TFTA’s most important benefit could be its catalytic role in achieving economic integration at pancontinental level – a Pan-African Continental Free Trade Area (CFTA) and Customs Union – as foreseen in the Abuja Treaty. In recognition of this role, the AU drafted a framework for the CFTA in 2011, in which the TFTA is envisaged as a potential model for a new approach towards continental integration. Negotiations about the CFTA would be launched after the completion of the TFTA (Zamfir, 2015).
The Impact of the Big States
The disparities in size amongst the member states are a reality. South Africa, Kenya, and Egypt have been highlighted as the largest economies in each of the three regional economic communities that will join to form the TFTA. According to Toesland (2015), smaller countries stand to benefit from this. The export profiles of these regional power players are good matches for the import needs of their smaller counterparts within the trade zone, due to their relatively diversified economies.
For example, countries like Uganda will have increased access to markets in Kenya to fulfil their mineral fuels, oil, iron and steel import requirements.
Some countries will need fundamental structural reforms to their economies before they can benefit from the TFTA. While Angola predominantly produces and exports oil, refined petroleum is the single largest share of imports. This demand must be met locally and the processing gap must be bridged, for the TFTA to have material influence on intra-African trade (Toesland, 2015). This will place an even larger demand on infrastructure development. The reality is that oil refineries do not come cheap.
The TFTA in Global Context
The launch of the TFTA did not receive as much media coverage as the ongoing negotiations of the Trans-Pacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (TTIP). Also, the TFTA is not considered likely to have any significant effects on the nature of the global trading system, at least in the short run. To further put this volume into perspective, a total trading account of $356 billion is barely a third of that of Singapore (Andriamananjara, 2015).
The TFTA is, however, considered by regional policymakers and some analysts to be a big deal and potentially a game changer for the African trading system. It is expected to be the launching pad for the establishment of the CFTA. The launch has demonstrated the possibility of collective action among 26 very heterogeneous nations and shows the feasibility of harmonizing three very different preferential trade regimes into one unified scheme (Andriamananjara, 2015). This shows that if the political will is present, much can be gained.
However, the actual implementation of the TFTA could still be a long and difficult process. It will require significant consultations with all relevant stakeholders and real political will from regional and national policymakers. Getting all the relevant parliaments to ratify the TFTA by the cut-off date, is also not going to be an easy task.
The Future of the TFTA Going Forward
The question now is how will foreign companies be able to function in Africa and get access to the benefits espoused in this article? What will the impact be for a Singaporean company interested in Africa?
Once the TFTA has been ratified, only companies within Africa or from countries with whom the TFTA has concluded free-trade agreements, will be able to conduct business in Africa whilst enjoying a tariff-free environment. This would include the EU EPAs and foreign companies already in Africa. Examples of the latter include Olam, Wilmar and PIL. These companies have access to the markets they already find themselves in, and would gain access to a much larger market of 630 million people after the TFTA has been ratified. Once the TFTA has been expanded to include West Africa, Tolaram and Indorama would be other examples of Singaporean companies who would be able to benefit from free movement across most of Africa.
Efficiencies and scale are going to be crucial. Given the size of the projected market, over 630 million consumers of which the middle class is growing strongly, there are a number of factors that need to to be prioritised. These include the ability to scale up production and operations, the ability to develop and maintain an efficient supply chain and distribution network, and the ability to accurately assess market demand, to name but a few. Global multinational companies have already demonstrated the validity of these factors, with the latest example being Kellogg acquiring 50% of Multipro in Nigeria for $450 million.
Disparte & Bugnacki (2015) are of the opinion that political commitment to the TFTA will not only boost regional trade, but also accelerate the rate and permanence of foreign direct investment (FDI) to the region. As Africa is already the fastest growing FDI recipient, the continent has stopped being merely a destination for extractive investors. Nairobi’s vibrant entrepreneurial and technical hubs and the development of global African entrepreneurs are signposts of this change.
The successful implementation of the TFTA will solidify Africa’s role on the global economic stage. The economic power it will be able to yield, both as a huge market of 630 million consumers and as a meaningful exporter of produced and value-added goods, will be far more significant than now. This situation will also reduce Africa’s sensitivity to the health of other global economies, such as that of China.
The TFTA population not only represents a rapidly growing middle class, but also a large group of young workers. Should they be developed properly (education and skills development is very important), they would attract even more FDI, which would set off a positive spiral of economic growth, jobs and wealth generation. China’s labour costs are rising relatively rapidly. This opens a door for Africa to take over as the world’s factory. This situation would gain impetus with a scenario where Africa presents a TFTA with the free movement of goods, services and labour, the latter hopefully being highly trained and skilled.
The TFTA is therefore an institution that, despite serious challenges, has the potential to serve Africa well. Economic integration will stand Africa in good stead, providing impetus to the development of its economies and infrastructure. Roads, railways, ports, energy, etc. are all examples of infrastructure that will be improved by the TFTA. It also provides motivation for foreign companies that will want to benefit from the scale of the large market presented. The opportunities are not only for consumer goods developed locally, but also for the development of the infrastructure.
An improved economic situation will improve the socio-economic situation of millions of Africans who live on the poverty line. This improvement will have the additional benefit of undercutting the grounds that terror organisations use to recruit disgruntled citizens. In turn, this will fuel the engine that drives tourism, as Africa has so much potential in this regard.
The envisaged diversified economies will need energy and investments. Whereas in the past potential investors had to be satisfied with national markets, they now have the benefit of a much larger market, reducing the risks of being trapped in one local market. Political risk and market risk will therefore be greatly reduced.
The envisaged more efficient supply chains will reduce risk even further. The costs will be lower, with much less waiting time to clear ports. Once cleared, goods will travel throughout the TFTA much faster and cheaper.
That the TFTA is considered as a forerunner of the CFTA is good news. Bringing on board ECOWAS is crucial for the long-term health of Africa. Nigeria is Africa’s largest economy and its largest population. An FTA without Nigeria will have severe limitations.
All that now remains is for Africa to embrace the TFTA and tap into the benefits thereof. It will require a strong political will to ease out all the tensions within the region involved and to ensure that progress is made on the road to full implementation. It will be a rocky road, but hopefully a road on which for every step backward, there will be 2 or more steps forward.
The author is the director of the NTU-SBF Centre for African Studies of Nanyang Business School, Nanyang Technological University, Singapore.
This article was first published in Africabusiness.com and the link is: www.africabusiness.com/2016/6/16/tfta.
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