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In brief

The African Continental Free Trade Area (AfCFTA) is one of the largest trading blocs in the world with the majority of African countries now operating under its preferential trade framework. Pomy Ketema, Counsel at Baker McKenzie in New York, discusses the agreement’s latest developments, and how businesses in Africa can benefit from AfCFTA, noting that the profitability of any endeavor depends on many factors, commercial and otherwise.

The African Continental Free Trade Area (AfCFTA) is one of the largest trading blocs in the world with the majority of African countries now operating under its preferential trade framework. Trading under AfCFTA commenced on 1 January 2021 under a liberalized trade regime that would gradually lead to an integrated continental market with tariffs phased out on 97% of tariff lines within 10 to 13 years.

AfCFTA covers both goods and services, and provides a platform for individual countries or Regional Economic Communities (RECs), as applicable, to engage in intra-African trade, through offers of tariff concessions and service commitments with reciprocal most-favored-nation treatment. There is already a degree of liberalized trade and integration under the eight RECs recognized by the African Union, and other customs and monetary unions that exist elsewhere on the continent. To date, it has been reported that 41 countries and the RECs, including SACU, EAC, CEMAC and ECOWAS, have submitted their tariff offers and service commitments. Admittedly, the implementation process has been slower than anticipated, with tariff books still being updated and administrative procedures getting rolled out.

Negotiations are continuing with respect to how to open up the service sector. The five prioritized sectors for liberalization within AfCFTA include business services, communication, financial services, transport and tourism. The second phase of services liberalization is anticipated to cover the remaining sectors. By some estimates, services make up around 60% of total intra-African trade, which is substantial when viewed in light of the continent’s overall GDP of roughly USD 3 trillion. With Africa’s emerging technological capabilities and limited legacy infrastructure to phase out, digitally delivered services seem to be the most logical large-scale expansion opportunity. This would, however, largely depend on successful negotiations that keep restrictions on cross-border services to a minimum.

With respect to goods, the sectors that are anticipated to immediately benefit from trade liberalization include agro-processing, automotives, pharmaceuticals, textiles, chemicals and mineral beneficiation. Numerous African economies are highly dependent on exports of raw materials. Hence, the lack of complimentary products suitable for trade could be an impediment until new industry develops. Those countries with large and diversified economies that have manufacturing capabilities are expected to benefit the most from AfCFTA.

Under the AfCFTA’s rules of origin, which could be product-specific, preferential trade is extended to goods that have either originated from or undergone substantial transformation in countries that have ratified the agreement. The process for identifying products that wholly originate in the AfCFTA is likely to be straightforward, particularly for farm products and resources from extractive industries. Products with more complex supply chains, however, could require extensive analysis to determine whether they are “sufficiently worked or processed” within AfCFTA and, if so, whether the whole product or the incremental value addition would be availed of preferential tariff rates.

Intra-African trade has been growing steadily and AfCFTA would simply accelerate that by removing the trade barriers that have caused the fragmentation of African economies. It should make basic necessities more accessible and affordable to the average African consumer by opening avenues for regional suppliers of processed goods to reach their target consumers more easily and allow payment options through local currencies. These features of AfCFTA should encourage industrialization, and multinationals seeking growth markets may find opportunities to establish or increase their African footprint.

Any business expansion plan must take a range of factors into account. At the most basic level, the market and legal framework must be studied for each country of interest, taking into account such country’s track record in handling foreign investment and cross-border trade. In addition, the degree of commercial presence required as a condition of market access must be assessed, along with the permits and registrations to be procured for each activity. Domestic laws are implicated in much of the detail set forth in the AfCFTA agreement, and the regulatory framework for a particular activity could be drastically different from jurisdiction to jurisdiction.

With respect to goods, while it is theoretically possible to set up operations in a few key jurisdictions and sell throughout the bloc, non-tariff trade barriers (NTB) and measures that participating countries could take to protect local industry might cause disruptions to remote selling activities. Examples of NTB recently implemented by some African countries include border closures, denial of permits and imposition of special taxes in the form of surcharges on imported products. While there may be valid reasons for taking such measures, any interruption to market dynamics could have serious consequences for an exporting enterprise. For that reason alone, establishing business operations in a large market that can absorb a significant amount of production would mitigate risk and, if combined with a well-developed transportation network that can reach potential satellite markets, it could be the ideal growth platform.

Local presence brings with it more commitments and higher costs of doing business. Footprint could be managed via ready-to-use industrial parks and special zones, which may provide easy access to major roads, onsite “one-stop” administrative capabilities to handle basic regulatory and procedural matters, and tax and customs deferral until products are introduced into the local market or exported. The incentives offered by African countries vary widely, such as multi-year income tax exemptions based on the industry involved, location-specific tax reductions or reciprocal low-tax-rate arrangements under REC agreements.

There is no single magic formula for operating under the AfCFTA agreement as its framework is layered onto existing trade relationships, and the manner of its application depends on the type of business activity involved and the arrangements among the countries that are implicated in a particular transaction. As a practical matter, low tariff rates are not the sole driver of business decisions. The profitability of any endeavor depends on many factors, commercial and otherwise, and AfCFTA’s value proposition lies in the incremental benefits it offers to enhance long-term value creation for goods and services to be traded in new markets.