The Africa Continental Free Trade Area: An Opportunity to Deepen Cooperation with India

By H.E. Prof. Dr. Ambassador Tal Edgars*

The Africa Continental Free Trade Area

The Africa Continental Free Trade Area (AfCFTA) signed in March 2018 aims to establish a single market across the continent.

AfCFTA is the biggest free trade agreement in the world since the World Trade Organization was created in the 1990s. When implemented, the AfCFTA is projected to increase intra-African trade by 52.3 percent by 2022, from 2010 levels. In turn, higher trade levels can facilitate economic growth, transform domestic economies, and help the countries achieve the Sustainable Development Goals (SDGs). My remarks and observations will be simply to analyse the AfCFTA in the context of Africa’s long history at efforts to build on regional integration and also examine the potential impact of the AfCFTA on India-Africa trade and bilateral investment whilst providing an argument that India must actively support the African efforts for AfCFTA.

Personally, I have been an advocate for the vision of “pan-Africanism” and “collective self-reliance” as an integral component of attempts by African leaders and policymakers to find Africa driven solutions to African problems. However, there has been a general failure to facilitate structural transformation of the continent due to a number of key issues. This structural breakdown has led to African nations continuing to be fragmented economies working mostly in isolation. Therefore, inorder to achieve an African resurgence, virtually all the African countries have embraced the notion of “regionalism” and “regional integration” as part of their broader aspirations towards continental integration. Over the years many Pan-African organisations have been working towards deepening economic, social and political integration in Africa.

Maybe a short revisit to one such instance made at the 18th ordinary session of the African Union (AU), held in Addis Ababa in January 2012, where a decision to launch a Continental Free Trade Area (CFTA) by 2017 was taken. This was followed by eight rounds of negotiations between 2015 and 2017. A major breakthrough was achieved on 21 March 2018 when leaders from 44 African countries met in Kigali, Rwanda, and signed a framework agreement to establish what is being called one of the world’s largest trade blocs. The agreement declared that the African Continental Free Trade Area (AfCFTA) would “come into effect 30 days after ratification by the parliaments of at least 22 countries. Each country has 120 days after signing the framework to ratify the agreement”.

Aims and objectives of AfCFTA The CFTA is an attempt by the African governments to “unlock Africa’s tremendous potential” to deliver prosperity to all Africans. It seeks to create a single continental market for goods and services with free movement of business people and investments. By 2030, the African market size is expected to reach 1.7 billion people, with a combined and cumulative consumer and business spending of US$6.7 trillion.

The CFTA aims to expand intra-African trade through better harmonisation and coordination of trade liberalisation and facilitation regimes and instruments across subregions (RECs) and at the continental level. As part of the agreement, “countries have committed to remove tariffs on 90 percent of goods with the remaining 10 percent of items to be phased in at a later stage”.

A study by the UN Economic Commission for Africa (UNECA) estimates that successful completion and implementation of the CFTA agreement – complemented with efforts to improve trade-related infrastructure, reduced import duties and transit costs – could lead to a 52.3 percent increase in intra-African trade by 2022, from the 2010 levels. The figures are expected to double upon further removal of non-tariff barriers. An increase in intra-African trade will “drive the structural transformation of economies from low productivity and labour intensive activities to higher productivity and skills intensive industrial and service activities”. This will subsequently help in generating better paid jobs, leading to poverty alleviation.

The AfCFTA also seeks to “foster a competitive manufacturing sector and promote economic diversification”. At present, manufacturing represents only about 10 percent of the total GDP in Africa, on average, lagging behind other developing nations. Given the CFTA’s enormous “market size of 1.2 billion people and over $3.4 trillion of cumulative GDP”, if implemented properly, the CFTA could reduce this gap by increasing growth in the manufacturing sector and its value-added products.

My humble opinion is that the continental free trade area is expected to offer substantial opportunities for industrialisation, diversification and high skilled employment. In tandem, such a market would also offer the opportunity to accelerate the manufacture and intra-African trade of value-added products, moving from commodity-based economies and exports to economic diversification and high-valued and assurance exports.

India-Africa trade and investment cooperation Since 2000, the economic cooperation between India and Africa has increased, helped by the India-Africa Forum Summit (IAFS) process. Both the regions have worked closely and engaged constructively with each other. The synergy that exists between India and Africa can be gauged from the robust trends in trade relations, wherein bilateral trade has increased five-fold in a decade – from $11.9 billion in 2005-06 to $56.7 billion in 2015-16.

India’s exports to Africa increased almost four-fold – from $7 billion in 2005-06 to $25 billion in 2015-16 – accounting for 9.5 percent share in India’s total exports. India’s imports from Africa during the same period increased seven-fold from – from $4.9 billion to $31.7 billion – accounting for 8.3 percent share in India’s total imports. India’s imports from Africa grew at an annual average of 29.8 percent while its exports to Africa grew at an annual average of 15.9 percent.

Recent trends show a steady decline in the India-Africa trade in both actual and comparative terms from 2013 to 2017. In 2014-2015, the total India-Africa trade stood at US$71.5 billion, which went down to US$56.7 billion in 2016-2016 and has further dropped to US$51.96 billion in 2016-2017. The balance of trade has also shifted in favour of Africa. India had a surplus of US$2.1 billion in 2005-06, which turned into a deficit of US$6.6 billion in 2015-16. India’s negative trade balance is mainly because of its high demand for oil and energy resources. Interestingly, India’s exports to the African countries have also been dominated by petroleum products. Therefore, in order to correct the trade imbalance, India needs to expand and diversify its export basket to include both primary and manufactured goods.

As for India’s investments in Africa, there has been an upsurge in recent years, mainly due to high-growth in some of the African markets and their mineral rich reserves. The Indian Multi National Enterprises (MNEs) have ventured into various sectors of investments spanning telecommunications, energy, computer sciences, power and automobile, among others. According to data from the Ministry of Finance, the Government of India and Reserve Bank of India approved a cumulative investment of US$54 million in Africa between 1996 and 2016 – nearly one-fifth of India’s overseas direct investments. The major destinations of such investments were Mauritius, Mozambique, Sudan, Egypt and South Africa.

However, just as in the trade, India’s investments in Africa have witnessed a slump since 2013. According to the World Investment Report 2018 of the UNCTAD, Indian FDI in Africa stood at $14 billion in 2016-2017, which is lower than $16 billion in 2011-12. One of the reasons for this is that apart from India’s traditional investors, few companies are looking at the continent with any degree of seriousness. An increase in the Government of India’s Lines of Credits (LOCs) to the African continent is not matched by a similar increase in investments by the private and public sectors.

In spite of such realities, there exists an enormous potential for improving the India-Africa trade and investment partnerships if the AfCFTA is used to its fullest form.

AfCFTA and its impact on India-Africa trade The AfCFTA will provide a number of opportunities for the Indian firms and investors to tap into a larger, unified, simplified and more robust African market. It is critical for India to view Africa not just as a destination for short-term returns but as a partner for medium and long-term economic growth.

An important component affecting the volumes of trade with Africa is the “third-country fabric” provision. Various Asian countries’ traders and investors, including those from India, are reaching out to the African markets as a market of “choice”. This is often perceived as a way to indirectly take advantage of the preferential trade programmes offered to the African countries by the third parties. A case in point is the African growth and Opportunities Act (AGOA) of the US, under which some African countries are eligible to source raw materials from third countries like India and China, to make clothes and then export to US duty-free. Such provisions help to shield African industries such as textiles and apparel, which have benefitted from huge amounts of Indian and Chinese investments in African export processing zones.

Therefore, to establish a long-term partnership with Africa, India should not target African markets only for its unilateral preferences granted by the third parties.

In terms of the possible trade diversion effects of the AfCFTA, a recent study of the Economic Commission for Africa (ECA) by Mevel and Mathieu (2016) projected that the African countries would be adversely affected by the signing of the Mega Regional Trade Agreements (MRTAs) due to erosion of preferences and increased competition in the MRTA markets.

MRTA’s are a recent phenomenon where countries or regions with a major share of world trade and foreign direct investment (FDI) join together and form deep-integration partnerships, with the aims of increasing trade links, improving regulatory compatibility, and providing a rules-based framework for working out differences.

If the RCEP is established, there will be an increase in intra-RCEP trade, as its member countries will be more inclined to trade amongst themselves. This will act as a detriment to third countries, i.e. India and African countries, whose export shares towards RCEP member countries will decrease. The total exports from Africa would decrease by about US$3 billion by 2022 as compared to a situation without MRTAs.

The following are the main findings of the study: 1. Exports from Africa towards the Regional Comprehensive Economic Partnership (RCEP) countries will decrease sharply by nearly US$11 billion. 2. Exports from Africa towards other areas outside RCEP countries will increase by US$8 billion. 3. Exports from Africa to the European Union will increase by US$1.5 billion. 4. Exports from Africa to the US will increase by US$2.5 billion. A 2018 joint report by the UNECA and Confederation of Indian Industries (CII) also provides some key findings: 1. Total African exports will decrease by US$3 billion if the MRTAs are established outside Africa, especially the RCEP. 2. African exports will increase by US$27.5 billion by 2022 if the AfCFTA is established in parallel with other MRTAs. 3. This surge in exports will be driven primarily by the increased intra-African trade which is expected to progress by US$40.6 billion (39.9 percent) while the African exports will decline everywhere else. 4. Indian exports to Africa will increase by US$5.7 billion (13.2 percent) if the MRTAs are established. 5. Indian exports to Africa will increase by US$4.3 billion (10 percent) following the establishment of the AfCFTA.

The above findings project that following the establishment of the AfCFTA, the India-Africa trade relations will be marginally affected, as opposed to being negatively affected after the creation of the MRTAs, especially the RCEP.

However, it is important to note that a bulk of the African exports to India consist of energy and mining products. Since there is less domestic demand for these products, the African countries are redirecting exports of these products from India, and to some extent from China, to the European Union and the US where they are able to maintain their preference margins.

As Africa’s exports to India will decrease following the establishment of the RCEP, Africa can look to its internal markets to offset a part of its trade losses. In absolute terms, this drop in the total amount of African exports to India will be the largest among the non-least developing countries (non-LDCs), amounting to three quarters of the total amount or US$7 billion. In relative terms, the exports from the African least developing countries (LDCs) to India will experience a bigger setback with a decrease by 18.7 percent as compared to a 12.1 percent decrease in export from the non-LDCs. Therefore, if the RCEP is established it will undermine the trade benefits extended to the African LDCs under India’s Duty Free Tariff Preference (DFTP) scheme for the LDCs.

It is important to note that positive outcomes for the India-Africa trade and investment partnership are hinged on Africa having sufficiently integrated markets, enhanced regional and continental connectivity, and improved infrastructure facilities. These will, in turn, help the African countries to address the supply-side constraints, remove bottlenecks, and move up the regional value chains. The African Trade Policy Centre of the ECA and CII must continue to work closely to identify the sectors that offer opportunities for development in Africa in the context of AfCFTA reform.

The Mevel and Mathieu (2016) study clearly projects the negative impact of MRTAs, especially the RECP, on India-Africa trade. Africa’s exports to India will decrease because there will be an increase in the intra-African trade. On the other hand, once the AfCFTA is established, India’s exports to Africa could increase by US$4.3 billion (or 10 percent) by 2022 because it will provide the Indian industries and companies a larger, more unified market with less restrictive regulations. Since the trade balance between India and Africa is in favour of the African countries largely due to India’s high demand for energy resources, crude oil and petroleum, the establishment of AfCFTA augurs well for India-Africa trade and investment partnership.

India agrees to the AfCFTA in principle and supports its successful implementation. This has been reiterated in the 2015 Delhi Declaration. However, India and Africa need to move in tandem to ensure that the full gains are realised. After the AfCFTA comes into force, it is expected not only to support industrialisation and structural transformation efforts in Africa but also offer a more visible and robust market for Indian firms and investors to access, thereby making Africa a top business partner for India.

The AfCFTA agreement represents a historic development in Africa’s journey towards creating a single, common and integrated market for the continent. To achieve this goal, it is imperative that the African countries develop the ability to produce and manufacture goods on their own, which will subsequently increase intra-African trade. There are many constraints that have impeded Africa’s progress. Some of the key ones are: lack of implementation of cohesive policies, underperformance in trade liberalisation, poor infrastructure facilities, lack of skilling, restrictive movement of persons, and illiteracy.

The biggest challenge facing the African countries is the creation of higher-wage manufacturing jobs that require a range of critical industrial policies and measures. For the less industrialised countries, initiatives like the Accelerated Industrial Development for Africa (AIDA), supplemented with domestic investments in education and training, as well as the implementation of the Africa Mining Vision, can complement the AfCFTA by helping the resource-based economies to strategically diversify their exports to other African markets. The success of these initiatives, and the extent to which higher-wage manufacturing jobs can be created, will determine if Africa’s demographic advantage will yield dividend. In an era of knowledge and digital economy, Africa has to focus on human capacity development by enhancing the skills sets of its workforce and providing universal basic education.

There is also a need to ramp up investments in infrastructure to build linkages within and among the African countries. The challenges are immense in the landlocked countries. On the other hand, although Africa has made progress through port modernisations and trans-border road projects, these need to be completed in time to provide economic benefits. The trade policies need to be harmonised and the non-tariff barriers eliminated.

As for the AfCFTA, the African countries must fast-track the process of ratifying it to realise its promise. They must demonstrate commitment to unite and create a single, large market for the collective aspiration of seeing the ‘Africa Rising’ come true. As Kwame Nkrumah, the first prime minister of Ghana and a visionary, argued half a century ago, the clarion call, “Africa Must Unite”, continues to ring true today.

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