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African Continental Free Trade Area: A new hope for continental integration

On 21 March 2018, the Agreement Establishing the African Continental Free Trade Area (the “Agreement”) was signed by 44 of the 55 member States of the African Union (the “AU”) at its 10th Extraordinary Summit, thereby creating a pan-African trade bloc.  After ratification by 22 countries, the Agreement entered into force on 30 May 2019.  As of the time of publication of this newsletter, 54 States had signed the Agreement and 36 of them had deposited their instruments of ratification.  In line with a Decision and Declaration adopted by the AU on 5 December 2020, the trade in goods under the Agreement commenced on 1 January 2021.

The formation of the African Continental Free Trade Area (the “AfCFTA”) is a monumental step in the economic integration of Africa as it aims to unite 1.3 billion people across 55 countries with a combined GDP valued at US$3.4 trillion.  According to the World Bank, the Agreement has the potential to lift 30 million people out of extreme poverty by 2035.

 

Background

The idea of continental integration to improve Africa’s economic performance began soon after the independence of African States in the late 1950s and was evidenced by the formation of the Organisation of African Unity (the “OAU”) in 1963.  The main objectives of the OAU were to promote unity and solidarity amongst African States and to intensify their cooperation to achieve a better life for the people of Africa.

The journey towards integration thereafter included the Monrovia Declaration of 1979, followed by the Lagos Plan of Action in 1980, and the Abuja Treaty in 1991 which set out a roadmap to create an African Economic Community (the “ACM”) by 2028 using the Regional Economic Communities (the “RECs”) as building blocks.

In 2002, the OAU was replaced by the AU with a vision to “accelerate the political and socio‑economic integration of the continent”.  However, even after two decades of the creation of RECs, intra-Africa trade remained markedly low.  Statistics by International Monetary Fund show that in 2017, intraregional trade in Africa was only around 17% of its total trade compared to the intraregional trade levels of over 50% in Asia and Europe.  It was against this backdrop that the AU at its 2012 summit decided to fast track the formation of an intra-continental free trade area by 2017.

The negotiations for AfCFTA began in 2015 and in the same year, the AU adopted Agenda 2063, a continental 50-year agenda for Africa’s long term socio-economic and integrative transformation.  AfCFTA has since been transformed from a mere vision to an executed agreement amongst 54 African States in less than 6 years, thus consolidating the dream of an integrated Africa “driven by its own citizens and representing a dynamic force in the international arena”.

 

Overview of the Agreement

The Agreement establishes a framework for implementation and administration of the AfCFTA and the related protocols.  The protocols are negotiated in phases.  Phase I of the negotiations resulted in the protocols relating to trade in goods, trade in services, and dispute settlement.  Phase II negotiations will cover investment, competition, and intellectual property rights, whereas Phase III will focus on e-commerce.  The negotiations are set to conclude by 31 December 2021 and the outcome thereof will be constituted as protocols on the relevant topics.

The institutional framework for AfCFTA comprises of: (i) the Assembly of Heads of State and Government of AU for providing oversight and strategic guidance, (ii) a Council of Ministers for ensuring implementation of the Agreement, (iii) a Committee of Senior Trade Officials to implement the decisions of the Council of Ministers, and (iv) the Secretariat.  Such a comprehensive institutional framework aims to serve as the foundation for the proper administration and facilitation of AfCFTA.

The Agreement reinforces that State Parties that are members of other RECs and have attained higher levels of regional integration shall be entitled to maintain such relationships.  Thus, AfCFTA is intended to function along with the RECs by treating them as building blocks for economic integration.  By reinforcing the principles of non-discrimination and market access, AfCFTA aims to extend similar protection to those States which are not members of the World Trade Organisation (“WTO”).

The Agreement also prioritises sustainable and inclusive socio-economic development, gender equality, food security and structural transformation of the State Parties.  This is line with Agenda 2063 and provides the connecting link for economic growth with sustainable development.

Another significant feature of the Agreement is the provision for review every 5 years to ensure effectiveness and achieve deeper integration.  This would provide AfCFTA with the flexibility to adapt to evolving regional and international developments and respond to new challenges.

 

Dispute resolution mechanism

The Agreement establishes a Dispute Settlement Mechanism (“DSM”) to be administered in accordance with the Protocol on Rules and Procedures on the Settlement of Disputes (the “Protocol”) and which is largely modelled on the Dispute Settlement Understanding of the WTO.  Provisions of the Protocol apply only to disputes arising between States in relation to their rights and obligations under the Agreement and to that end, the Protocol creates a Dispute Settlement Body (the “DSB”).  The DSB in turn has the authority to establish Dispute Settlement Panels (a “Panel”) and an Appellate Body, to adopt their reports, survey the implementation of their rulings, and to authorise the suspension of concessions and other obligations under the Agreement.

The Protocol provides for consultations as the first step towards dispute resolution.  State Parties to a dispute also have the flexibility to voluntarily undertake good offices, conciliation or mediation at any time, in a confidential manner and without prejudice to their rights in other proceedings.  This encourages States to explore ways to amicably resolve their disputes before invoking the formal DSM procedure.  In the alternative, States may also invoke arbitration as the first avenue for dispute settlement, in which case they are not permitted to simultaneously refer the dispute to the DSB.

Where consultations are unsuccessful, the matter may be referred to the DSB seeking establishment of a Panel to set in motion the process for formal resolution of the dispute.  A third-party State with substantial interest in the dispute can also participate in the proceedings.  The report containing the majority view of the Panel is brought for consideration before the DSB.  DSB then considers the report and decides whether to adopt it or not.  A party to the dispute may also notify the DSB of its intention to appeal the report to the Appellate Body.  However, appeals are only limited to issues of law and legal interpretations of the Panel.

As a remedial measure, a State that is found to have violated the Agreement is required to bring its measures in conformity with the AfCFTA.  The aggrieved party is entitled to compensation and suspension of concessions and other obligations as temporary measures if the ruling of DSB is not implemented within a reasonable period of time.

The future of Investor-State Dispute Settlement (“ISDS”) under the Agreement is presently unclear.  Only when the Phase II negotiations are complete will we know whether the investment Protocol provides for an ISDS mechanism.  However, it is worth noting that the recent trend of African States has been to exclude investor-State arbitrations or impose restrictions on them in the regional agreements and Bilateral Investment Treaties (“BITs”).  This could potentially be reflected in the approach adopted by AU towards settling investment claims.

 

Potential impact of AfCFTA

AfCFTA indicates a new era in the vision for integration of the African markets.  The Agreement is expected to create a single liberalised market for trade in both goods and services.  This would result in enhanced economic cooperation and intra-regional trade amongst African countries, thereby creating more jobs, stimulating investment, and improving competitiveness in the continent.

Starting from 1 January 2021, tariffs on 90% of the goods traded between AfCFTA State Parties are to be reduced in annual instalments until they are eliminated within 5 years (10 years for least developed countries).  Similarly, the Agreement also provides for elimination of non-tariff barriers and cooperation on implementation of trade facilitation measures.  As per the World Bank, proper execution of the Agreement could boost Africa’s income by US$450 billion, lower gender wage gap, raise the income of 68 million people wo live in moderate poverty and increase Africa’s export by $560 billion by 2035.

The AfCFTA could also prove to be crucial in a world plagued by the COVID-19 pandemic.  Like most regions around the world, the pandemic has taken a heavy toll on African economies by pushing the region to its first recession in 25 years.  Trade in critical supplies such as food and medical supplies has also been affected. With its plans of regional integration and streamlining of border procedures, AfCFTA could be Africa’s economic recovery plan to achieve accelerated economic progress and boost mutual self-sufficiency through long-term reforms.

As trading under AfCFTA commences in January 2021, the President of South Africa and Chairperson of the AU, Cyril Ramaphosa, is hopeful that “it will unleash regional value chains that will facilitate Africa’s meaningful integration into the global economy and improve the prospects of Africa as an attractive investment destination.”

 

Conclusion

The AfCFTA is the dawn of a new era of intra-regional trade that aims to benefit all member States through expansion of the market and by overturning outdated trade models.  However, implementation of the Agreement could prove to be an uphill task and will require the determined effort of all participating States.  This in turn calls for appropriate legislations and policies that provide reliable and transparent rules for proper functioning of the market.  But, if successfully implemented, the AfCFTA could be instrumental in propelling Africa forward as a leader on international trade platforms.