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Continental Free Trade Area – What exactly is this trade agreement?

Continental Free Trade Area – What exactly is this trade agreement?

By Kizito Sikuka

Southern African News Features – If 25 May represents the day that Africa got rid of the remaining vestiges of colonisation and apartheid, then 21 March is the day that the continent made a bold move to reform global trade.

Meeting in Kigali, Rwanda on 21 March, African countries signed a historic agreement to establish the largest trade arrangement commonly known as the “Continental Free Trade Area” (CFTA).

In addition to this, two other major economic agreements were signed at the African Union (AU) Extraordinary Session of Heads of State and Government. These are the Protocol establishing the African Economic Community relating to free movement of persons, right of residence and right of establishment; as well as the Kigali Declaration.

In fact, a total of 44 out of 55 AU Member States signed the agreement to establish a CFTA, while 27 signed the protocol to the treaty establishing the African Economic Community relating to free movement of persons, right of residence and right of establishment.

Chairperson of the AU, President Paul Kagame of Rwanda described the signing of the CFTA agreement as a historic landmark for the continent to transform its political independence into sustainable economic development.

He said that this momentous occasion would not have been achieved if all the African leaders from “the past and present” had not worked together – highlighting that efforts to establish the CFTA is not a new phenomenon, but a culmination of a vision set forth nearly 40 years ago in the Lagos Plan of Action, adopted by AU leaders in 1980.

That undertaking led directly to the Abuja Treaty establishing the African Economic Community in 1991.

President Kagame said the establishment of the CFTA will change the economic landscape in Africa and act as an engine for economic integration and development.

“Increasing intra-African trade does not mean doing less business with the rest of the world. On the contrary, as we trade among ourselves, African firms will become bigger, more specialized and more competitive internationally,” he said.

“The promise of free trade and free movement is prosperity for all Africans, because we are prioritising the production of value-added goods and services that are “Made in Africa”.

His South African counterpart, Cyril Ramaphosa, who is also he chairperson of the Southern African Development Community (SADC) concurred, adding that the next step to complement the CFTA is to promote the smooth movement of people across the continent.

He said breaking down colonial barriers by opening up borders will encourage intra-regional trade, facilitate the movement of skilled personnel in the region, deepen people-to-people exchanges, as well as turn the migrant challenge into a human capital boon for Africa.

“You cannot have a free trade area without free movement of people,” Ramaphosa said, adding that it was time for the continent to come up with a single passport for its citizens to ensure that the benefits and opportunities of belonging to a shared community in Africa are fully enjoyed.

But what exactly is this CFTA? How does it work, and why it is so important for Africa?

A Free Trade Area (FTA) generally refers to a region where a group of countries sign an agreement to reduce trade barriers in order to increase trade of goods and services with each other.

For example, when SADC attained the status of the FTA in 2008, intra-regional trade in southern Africa increased from US$89.3 million in 2001 to US$394 million in 2012, representing a 341 percent increase over an 11-year period.

Furthermore, consumers in the region are now getting better products at lower prices due to increased production, while producers are benefiting from a tariff-free trade for all goods originating within the region.

In this regard, the CFTA aims to promote the smooth movement of goods and services across borders, as well as allow member countries to harmonize regional trade policies to promote equal competition and increased trade.

According to the AU, the CFTA when fully operational is expected to increase African intra-regional trade from the present 10 percent to about 40 percent.

The CFTA also represents a bold statement and significant opportunity for the continent to redress the vulnerabilities of Africa’s economies within the global economic order, which has seen the continent trade more with the outside world than within Africa.

This trade structure means that resources that are intended to develop Africa are shipped and traded elsewhere, improving the economies of other countries in Europe, Asia and the United States.

The current trade imbalances are caused by various factors including poor infrastructure built during the colonial era to disallow any smooth movement of goods, services and people between African countries, as well as the imposition of non-tariff barriers between African countries.

Another major factor is the lack of a vibrant industrialized sector that weans Africa from being a source of cheap raw materials for other countries in the west.

So how will the CFTA work?

The CFTA is expected to be implemented in various stages since the overall process of regional integration in Africa including its eight Regional Economic Communities (RECs) is at different stages.

In this regard, the CFTA will build on the existence of other FTAs in the continent such as the SADC FTA and the pending “Grand” FTA involving the Common Market for Eastern and Southern Africa (COMESA), the East African Community and SADC.

However, the actual implementation of the CFTA will entails that all members of the trade agreement abolish any tariffs, taxes or special requirements for import on goods from other member countries.

Parties to the agreement must also discourage any monopoly of the domestic market to make it easier for international producers to penetrate the market.

The implications of these regulations is expected to promote free and fair trade and competition among member states, thereby encouraging countries to work together rather than as individual states.

As such, some of the benefits that will accrued from the CFTA include the harmonization of trade policies, and removal of non-tariff barriers, enabling countries to increase their earnings, penetrate new markets and contribute towards their national development.

Furthermore, the CFTA will resolve the challenges of multiple and overlapping memberships and expedite the regional and continental integration processes.

Currently, most countries in Africa belong to more than one RECs, a situation that usually led to conflicts of loyalty and confusion of commitment, thus hindering progress of integration in Africa.

Therefore, addressing the issues of overlapping membership has the capacity to accelerate the pace of integration in Africa.

The establishment of the CFTA is also expected to enhance competitiveness at the industry and enterprise level through exploiting opportunities for scale production, continental market access and better reallocation of resources.

The decision to establish a CFTA was adopted by the 18th Ordinary Session of the Assembly of Heads of State and Government of the AU at their annual summit held in Addis Ababa, Ethiopia in January 2012.

Negotiations for the CFTA began in June 2015 with the initially date of the launch set for 2017. However, this was delayed to ensure that the right modalities are put in place for the success of the market.

The CFTA brings together all the 55 AU Member States, creating a combined market of more than one billion people and a combined Gross Domestic Product of more than US$3.4 trillion.

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