Business

Free trade: Devil still in the detail

2015-06-14 15:00

The long-awaited Tripartite Free Trade Area (TFTA) was launched in Egypt this week, spawning euphoric official praise for the “Cape to Cairo” trading bloc, which is meant to be the foundation for an eventual single African economy.

The summit this week did not, however, actually create a “free trade” area in the traditional sense of the term. That is still a distant prospect with haggling around the basic issues like actual tariff reductions, permissible protection from imports and the all-important “rules of origin” expected to carry on for at least the next year.

What is now about to become a binding agreement between almost half the continent will first push a far more pragmatic agenda, with the “progressive elimination of tariffs” taking the back seat for now.

Despite its name, the TFTA doesn’t really fit the traditional label of free trade area, said Trudi Hartzenberg, executive director of the Stellenbosch-based Trade Law Centre. “I’d prefer to call it an integration plan, not a free trade agreement.”

The TFTA text from this week was supposed to get launched in December last year, but was delayed.

It has now been signed just in time for the beginning of negotiations on the larger Continental Free Trade Area, which will be ceremonially launched tomorrow at a meeting of the AU in Johannesburg.

Signing the TFTA deal just before the African Union launch was probably a consideration to signal commitment to the overall project of African integration, said Hartzenberg.

It does also show that there is sufficient agreement on “the practical stuff”, she told City Press.

The TFTA text unveiled in Egypt on Wednesday will have to be ratified by member countries’ parliaments. It comes into effect when 14 of the parliaments have okayed it. By now, 15 countries have already signalled that they will ratify it, meaning the deal is more or less sealed.

The meat and bones of the free trade agreement will, however, be contained in 14 or so annexes, each dealing with a crucial aspect of the deal.

The basic “free trade” annexes on tariffs, remedies and the rules of origin are still being finalised. This is called “phase one”. Phase two, on the trade in services, intellectual property, competition policy and other issues, has a target for completion in 2017. The two will run concurrently.

The parties are giving themselves a year to complete phase one, which will see countries make offers on tariff reductions among themselves, according to Trade and Industry Minister Rob Davies.

An annex on non-tariff barriers is, however, agreed, which some think is really the more important issue.

“We don’t need a traditional free trade area. We need pragmatism,” said Hartzenberg. “What Africa really needs is better roads and regulations.”

As an example of “practical stuff”, she cites regulations on axle loads for trucks. If the maximum load allowed changes at a border, it creates a pretty severe trade barrier.

One-stop border posts are another simple but key intervention to end the need for truckers to stop on one side and then on the other of a border, and in essence do the same paperwork twice.

“Tariffs are inherently more sensitive. They are used to protect industries, they are visible and they also provide revenue to governments.”

Liberalising trade will inevitably lead to adjustments where there are winners and losers, said Hartzenberg. “Domestic policy needs to mitigate the impact.”

Asymmetry is, however, a key principle and larger, more developed economies will have to give more than they take.

Even without the detailed annexes, it is clear that the TFTA is not meant to damage the primary commodity markets on which much of the continent depends – or interfere with attempts to leverage benefits off “strategic” natural resources.

National policies on the import or export of “strategic minerals” fall under the general exceptions.

“We are not looking to expand trade in minerals among ourselves,” said Davies. “The focus is very much on value-added products. We’re not going to promote more regional trade if we only do trade integration.”

The TFTA agreement will still allow countries to use countermeasures if imports from the other TFTA partners “threaten to cause serious injury to domestic production”.

Reducing tariffs by itself will not really do much to increase trade on the continent, said Davies.

The focus is on value-added goods and “development integration”, which includes investment in transport infrastructure that crosses national borders.

At this past week’s summit, secretary-general of the Common Market for Eastern and Southern Africa and outgoing chair of the TFTA task force Sindiso Ngwenya criticised the developmental advice given to newly independent African countries in the 1960s by the World Bank and others to not build ambitious mega infrastructure unsupported by cost-benefit analyses.

If the West had followed that advice, the Western frontier of the US would never have been conquered, said Ngwenya.

A number of studies have tried to gauge who would gain what if the African countries involved in the TFTA all dropped their tariffs.

Although it is a very unlikely scenario, such a total switch to free trade would likely benefit South Africa and a few other larger African economies above all else – and actually hurt many smaller countries.

The Trade Law Centre recently published a study on the hypothetical impact of halving the burden of non-tariff barriers, compared with reducing all tariffs to zero on the entire continent.

Zero tariffs result in a very uneven benefit, where mostly South Africa wins, with Nigeria a distant second. Zimbabwe, in particular, loses significantly because of its reliance on tariff revenue.

The hypothetical halving of non-tariff barriers, however, leads to a much larger welfare gain for the continent that is also better spread out. South Africa still wins, but so do the other major economies, including Kenya, Egypt, Nigeria and Tanzania.

. The TFTA is an amalgamation of three existing regional economic communities: The Southern African Development Community, the East African Community and the Common Market for Eastern and Southern Africa.

. The TFTA will comprise 26 countries, about half of Africa’s economy. It will largely exclude west and north Africa, but is meant to be the basis for an eventual Continental Free Trade Area covering the entire continent.

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September 15 2019