Advancing EU-Africa cooperation in light of the African Continental Free Trade Area

The AfCFTA creates space for the EU to move beyond the traditional development cooperation niche and offers a strategic opportunity for African and European actors to meet on equal terms, enhance political partnership, and strengthen links between the two continents.

This article is excerpted from the first paper in a special series on Africa-EU relations, produced by members of the European Think Tank Group (ETTG). The views expressed are those of the authors.

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With the African Continental Free Trade Area (AfCFTA) agreement, Africa has embarked on the biggest economic integration initiative, in terms of number of participating countries, since the creation of the World Trade Organization (WTO) 25 years ago. The COVID-19 pandemic, however, has led to postponement of the effective utilization of the trading conditions provided through the AfCFTA. Initially scheduled for July 2020, the new target date for the AfCFTA’s launch is January 2021.

While COVID-19 has affected the timing of AfCFTA implementation, it does not diminish the agreement’s potential impact on economic development in Africa.

For example, the AfCFTA could dramatically increase African countries’ trade in manufactured goods and services, both of which feature more prominently in intra-African trade than in Africa’s global trade. According to the International Monetary Fund, trade among members could be lifted by 15-25 percent in the medium term if intra-African tariffs are removed as scheduled. Recognizing the poor record of economic integration on the African continent, the impact of the AfCFTA would be significantly increased if non-tariff barriers (NTBs) and infrastructure deficits were also addressed. The World Bank estimates that the AfCFTA’s largest gains could come from reduction of NTBs, particularly trade facilitation reforms.

Taking a dynamic perspective, the trade liberalization triggered by the AfCFTA, as well as accompanying measures to attract domestic and foreign direct investment, could foster regional value chains that could eventually serve as a stepping stone into global markets. This points to the AfCFTA’s longer term potential to address many overarching development challenges in Africa, such as poverty and underemployment.

Paradoxically, the AfCFTA—a flagship project of the African Union (AU) “Agenda 2063” framework for Africa’s socio- economic development—comes into force at a time of increasing trade protectionism in many developed and emerging countries. The pandemic has further exacerbated this trend, strengthening the case for more continent-wide cooperation among African states.

Recognizing that the AfCFTA represents an important step towards the longstanding vision of an economically integrated Africa, the continent’s external partners are taking a keen interest and are providing substantial development cooperation support. Being a strategically and economically important partner region, Africa’s large resource endowments and immense market size have attracted global players including China, the United States, and the European Union (EU).

For the EU, in particular, the AfCFTA provides a new entry point for support to a continental initiative for rules-based cooperation in Africa and to reach out for allies at a time of growing skepticism towards multilateralism in other parts of the world. The EU has strongly expressed its support, with the European Commission indicating that it sees the AfCFTA as a “step towards our long-term objective of a continent-to-continent free trade area between Africa and the EU.”

Political will, institutional capacity, and other AfCFTA hurdles

Successful implementation of the AfCFTA is not a given. Beyond finalizing the ongoing negotiations, a key variable for a successful AfCFTA will be whether African states not only ratify the AfCFTA agreement, but also fully implement and actually comply with it. Political will and sufficient capacity are needed at various levels of government and in the private sector to turn the AfCFTA’s potential into tangible development outcomes.

Looking at existing economic integration schemes on the continent, Africa’s track record in regional economic integration does not appear overly promising. The regional economic communities (RECs) have long grappled with implementation gaps, often blamed on a lack of capacity or political will. They have faced institutional weaknesses and a lack of expertise at the national level, as well as a lack of dedicated funds.

AfCFTA implementation involves a larger number of state parties, with huge variation both within and across participants in terms of their experience in reciprocal trade arrangements, and in terms of their institutional capabilities and readiness to implement and take advantage of a relatively comprehensive trade agreement. It will be important to identify and address capacity constraints at the national level and to identify which supporting institutions need to be established or strengthened for effective AfCFTA implementation.

The experiences of the RECs also suggest that regional integration has not always been a political priority among national elites in the signatory countries. Whether the AfCFTA can help change the domestic political calculus is an important question, as national political dynamics will determine whether the AfCFTA is effectively implemented and utilized to foster economic development across the African continent.

Beyond institutional capacity and political will, several other structural challenges will affect whether AfCFTA implementation is ultimately successful, including: the need for participating countries to bridge regional differences and stay committed to AfCFTA goals; the need to ensure widespread distribution of benefits and economic opportunities, especially for women and marginalized groups; the need to address NTBs to intra-African trade; and the ability of the private sector to actually utilize the opportunities that the new pan-African market brings.

Lastly, the ongoing COVID-19 pandemic creates additional uncertainty for AfCFTA processes. Already, the pandemic has delayed finalization of the phase 1 negotiations and the indicative start date for trading under the AfCFTA. It could also hinder implementation on the technical front, due to the pandemic’s adverse effects on African private sector activity.

On the other hand, AfCFTA activity could function as a catalyst for much needed regulatory and structural reform among members and as a remedy for a struggling private sector. For example, the fallout from COVID-19 could trigger trade reforms that go beyond the mere removal of tariffs, to include services and e-commerce.

Related: COVID-19 – Ten Policy Priorities for Africa’s Recovery, Growth, and Transformation

The role of existing trade policy arrangements

Formal trade relations between the EU and AU members span a variety of different trade arrangements, which also reveal substantial differences in depth, scope and commitment. While the EU has signed a number of free trade agreements (FTAs) with North African countries, trade and economic cooperation with Sub-Saharan countries is governed by seven regional or bilateral economic partnership agreements (EPAs).

Despite the emphasis placed on strengthening the EU’s relationships with its African trade partners, the EPAs have been recurrently promoted as a building block for the AfCFTA. For example, while the EPAs foresee gradual removal of some 80 percent of the tariffs imposed on EU exports to Africa, “regional preference” clauses ensure that tariff concessions applied to these imports from the EU are duplicated among signatories to the same EPA. With time, this built-in mechanism has the potential to eliminate existing intra-African tariff.

In addition to the FTAs with North African countries and the EPAs, Africa-EU trade relations feature preferential trade regimes, such as the EU’s Generalised Scheme of Preferences, which stipulates removal of duties on two thirds of tariff lines, and the Everything But Arms scheme, which guarantees duty-free and quota-free access to EU markets.

In 2007, following the World Trade Organization’s Aid for Trade (AfT) initiative, the EU adopted its own strategy and has since provided AfT to developing countries for more than a decade—and Africa has been the main recipient. The continent received 40 percent of total EU and EU member state AfT in 2017, outranking Asia (22 percent), Latin America (9 percent) and Eastern Europe (9 percent). Considering AfT from EU institutions only, Africa’s share was even larger, at 58 percent of the total AfT disbursed.

Despite these mechanisms, the EU recognized in a 2019 AtF progress report the need for further “improvement of EU AfT interventions in support of regional integration” in Africa. The AfCFTA offers a focal point for such improvement.

Opportunities and challenges for EU-Africa cooperation

Already, the EU has provided substantial political, technical, and financial support for the AfCFTA’s establishment. Its largest financial contribution came from the Pan-African Programme under the EU Development Cooperation Instrument. In 2018 the EU brought this support under the umbrella of its Africa-Europe Alliance for Sustainable Investment and Jobs.

Two other initiatives earmarked for support are the establishment of an African trade observatory to track intra-Africa trade, and the harmonization of tariff nomenclature and goods classifications based on World Customs Organization standards to facilitate cross-border trade, especially across existing RECs.

EU support for the AfCFTA is also channeled through two other pillars: AfT projects for Africa and the External Investment Plan for Africa and the EU Neighborhood. The latter is expected to leverage private and public investment from within and outside of Africa to provide an engine for trade through jobs creation and improved production capabilities on the continent. Regarding the former, country and region-specific AfT initiatives address a number of bottlenecks in African economic integration.

Individual EU states, such as Germany, France, and Denmark provide targeted support for the AfCFTA through their bilateral development cooperation programs, in addition to being key providers of AfT.

But significant challenges remain to current and future cooperation. For example, non-tariff barriers continue to impede intra-Africa trade and the development of regional value chains, which are seen as stepping stones to further integration into global value chains. The effects of these can offset the benefits gained by tariff reductions.

While the AfCFTA has the potential to help eliminate existing tariffs, it is well known the absence of intra-African trade is largely due to the continent’s lack of productive capacity and its insufficient physical infrastructure, both within and across countries. To address these barriers, between 2007 and 2019 the EU-Africa Infrastructure Trust Fund (EU-AITF) supported investments in water, energy, transport, and ICT, blending long-term loans from participating financiers with grant resources from both the EU Commission and EU member states.

Diversification of resources is also a problem. Notwithstanding the EU’s considerable engagement on AfT in Africa, resources are highly concentrated within a handful of countries. Morocco, Kenya, Ethiopia, Egypt, Tanzania, and Tunisia absorb half of the EU’s support. By contrast, support for least-developed countries, particularly in view of the infrastructure challenges they face, has hardly been ramped up for a decade.

One implicit challenge for the success of the AfCFTA is to ensure fair distribution of benefits and compensate “losers” from integration. In this respect, the Afreximbank announced a $1 billion adjustment facility to cushion the blow of reduced government revenues from tariffs.

What is sorely missing, however, are financial resources to cope with the likely structural adjustment costs imposed on African firms and industries to keep pace with the desired increase in competition. Here, important lessons can be drawn from a number of EU mechanisms, such as the European Globalization Adjustment Fund—which provides support to those losing their jobs as a result of major changes in world trade patterns—or the European Regional Development Fund—which provides lessons in coping with structural imbalances between integrating countries.

Applying the logics of these and other initiatives to the African context could increase acceptance of continental integration among those adversely affected in the course of AfCFTA implementation.

The way forward and key recommendations

The AfCFTA, on its own, is unlikely to achieve the overarching goals set in the AfCFTA agreement. Considerable accompanying measures, reforms, and investment are also needed. Taking into account existing EU-Africa ties in trade and development, there are four key areas in which the EU can offer targeted, AfCFTA-related support—and strengthen cooperation between Africa and the EU.

1. Reorient around AfCFTA

Given the AfCFTA’s central role in African economic development, the EU should organize and prepare its trade-related support at the national, regional, and continental levels as “AfCFTA support” for economic integration. The AfCFTA needs to be seen as the central pillar of the AU’s goal to create an African Economic Community.

Support for the AfCFTA is especially important given the current circumstances, as COVID-19 has highlighted Africa’s dependence on imports for essential goods such as food, pharmaceuticals, and medical devices. At the same time, African exporters have been hard hit by price slumps in global commodity markets and disruptions in global value chains. Reducing intra-African trade costs will open opportunities for post-pandemic economic recovery and improve Africa’s economic resilience to future external shocks. In this respect, external support for the AfCFTA should be seen as an investment in Africa’s post-pandemic economic recovery.

Furthermore, the EU can align European investment initiatives in Africa with the AfCFTA to take advantage of the economic opportunities it offers. Support for the AfCFTA needs to be a key element in the G20 Compact with Africa and the European External Investment Plan

2. Support economic reforms

To achieve the overarching goals of the AfCFTA agreement, additional economic reforms—alongside trade liberalization—will be needed. The EU should therefore focus on supporting African countries to build institutional capacity at multiple levels, reduce the costs of logistics, improve trade-related infrastructures, streamline non-tariff measures, improve the investment and business climate, build productive capacities and regional value chains, and advance training and education for a skilled workforce. The significant benefit of these broader reforms points to the high potential of EU support for the AfCFTA phase 2 and 3 negotiations, which focus on services, investment, intellectual property rights, competition and e-commerce.

3. Coordinate efforts and align to local needs

Given the limited capacities to translate AfCFTA’s potentials into concrete policy reforms, it is essential that the EU’s approach to AfCFTA support be well coordinated and aligned to African countries’ individual needs. Policy coherence can be achieved not only across the EU and its member states, but also across the different issue areas, such as trade facilitation, private sector development, agricultural production, and infrastructure development, to name a few.  Additionally, EU development cooperation needs to encompass both financial and technical assistance for the AfCFTA. To this end, the EU should include an operational joint declaration as part of the key outcomes of the next AU-EU Summit.

4. Engage the private sector

Africa’s private sector plays a crucial role in translating the AfCFTA’s institutional framework into practical action on the ground. It is therefore important to support the productive capacity of African countries so that private actors can attract investment and take advantage of new AfCFTA opportunities. Donors and external partners, such as the EU, should engage in dialogue directly with Africa’s private sector about its specific needs, instead of deferring to governmental and institutional contact levels. In particular, external partners could stimulate Africa’s business environment by supporting initiatives to reduce the costs of doing business.