UNCTAD showcases the potential of the African Continental Free Trade Agreement
CAIRO – December 19, 2021: The United Nations Conference on Trade and Development (UNCTAD) released a report in December proposing how the African continent can make the most of the African Continental Free Trade Agreement (AfCFTA), which entered into force in early 2021.
The role of the AfCFTA in reducing poverty and income inequalities
The report points out that 34 percent of African households live below the poverty line. In addition, the Gini coefficient – measuring income equality – registers 0.4, which means that there is a large income gap. The report shows that “economic growth is inclusive, if there is a simultaneous reduction in poverty and inequalities in all segments of the population”.
Although the free trade component involves the elimination of tariffs, that is not all. UNCTAD stressed that for the AfCFTA to materialize, large, medium and small enterprises must have “good access” to “markets and productive resources”. As for workers, they “need to acquire better skills to meet the changing demands of the labor market“.
The organization is also prioritizing digitization, financial inclusion and modernization of infrastructure to boost the industrial sector and hence intra-African exports and trade. In addition, he urges that the executive document of AfCFTA regulates the movement of goods by creating harmony in terms of regulation.
Informal cross-border trade
The report refers to the attempt to define informal cross-border trade by economists Caroline Lesser and Evdokia Moise-Leeman mentioned in a 2009 research paper. The definition suggests that informal cross-border trade means that trade is carried out by companies that are part of the informal sector, or by enterprises operating in the formal sector but using “unofficial routes” completely exempt from rights.
Sometimes the evasion is partial by committing “under-invoicing, which is declaring a lower quantity, weight or value of the goods in order to pay lower import duties, misclassification, in terms of falsifying the goods. description of the products so that they are misclassified as products subject to customs tariffs, false declaration of the country of origin and / or bribery of customs officials. “
The report recommends using satellite data collection, artificial intelligence (AI) and mobile phone data collection to detect informal cross-border trade. Although measures have been taken to facilitate trade, mainly the elimination of tariffs, there are other obstacles. Examples include “the arbitrary application of rules and requirements by border officials for goods eligible for simplified processing”. In addition, the simplified trade regime does not remove “the obligation to obtain import and export permits for agricultural products or animal products”, which are expensive and difficult to acquire. Moreover, this facilitation regime “does not eliminate immigration or sanitary and phytosanitary measures or the value added tax, excise duties and associated processing fees”.
The report suggests the following to facilitate intra-African trade: simplification of customs procedures; the reduction of non-tariff barriers associated with informal trade; and, a simplified continental trade regime, comprising simplified customs documents, simplified customs clearance procedures, a common list of products, a threshold for the value of consignments and a common passport or laissez-passer for traders.
It is noted that 86 percent of African workers are informal, while 30-40 percent and 40 percent of intra-SADC (Southern African Trade Community) and COMESA (Common Market for Eastern and Southern Africa) trade. is informal.
Endurance to crises
Speaking of the impact of the pandemic-induced recession on Africa, the continent suffered a double blow as it faced a shortage to meet its needs, due to declining production in the United States, in Europe and Asia, while demand on its exports has fallen. UNCTAD pointed out that the crisis has been exacerbated by African countries which have imposed restrictions on the movement of people and goods due to COVID-19. Currently, to achieve recovery and move forward with integration, “streamlining the industrial sector to support regional value chains, while leveraging the digital economy” is essential.
In times of crisis, the UNCTAD study suggests relying on the AfCFTA to coordinate a response targeted to small traders. Indeed, during the pandemic, “the regulations favored traders with larger shipments and means of transport”. In addition, costs have skyrocketed due to route changes and subsequent delays.
The report further suggests facilitating the movement of individuals, as skilled workers are needed in various sectors such as education, healthcare, engineering, information and communications technology and seasonal jobs like those related to cash crops.
Another weak point that needs to be addressed is that Africa imports almost 85 percent of its food from outside the continent. The solution is “higher production and productivity in the food manufacturing sector”. Likewise, to reduce poverty, the share of labor-intensive manufacturing industry must increase, while dependence on food imports must decrease.
Preparations of cereals, flour, starch and milk as well as various edible preparations are sectors with export potential. Nonetheless, food processing, among other industries, faces constraints related to limited adequate access to electricity and high transportation costs.
Intra-African trade edge
UNCTAD shows that intra-African trade has advantages that are lacking in trade between African and non-African countries. According to a survey of medium and high-tech manufacturers conducted by UNCTAD and the International Trade Center in 2021, intra-African exports are technologically more advanced. In addition, processed products account for 41 percent of intra-African trade against 17 percent of exports to the rest of the world.
UNCTAD stresses that Africa depends on China, India and the European Union to meet its needs for medical products, and that such vulnerability became evident during the pandemic when restrictions were imposed on exports of medical supplies. The organization admits that investments in the sector have increased, but they are still not enough.
“Major imports of medical supplies to Africa include disinfectants and sterilizers, medical consumables, test kits, and medical and surgical equipment. However, the high average tariff rate of 10.3% applied by African countries on these products restricts the access of producers and consumers to affordable medical products. In addition to tariffs, many companies face difficulties in importing intermediate inputs, due to non-tariff measures. Two of the three main inputs in the production of disinfectants, ethanol and plastic bottles, are already supplied in reasonable quantities on the continent, the main suppliers being Egypt and South Africa. The other input, glycerol, is not yet produced in sufficient capacity, and producers of disinfectants depend on imports from outside Africa, ”the report explains.
Investments in the sector increased from $ 2.7 billion in 2016 to $ 4 billion, but fell to $ 1.1 billion. Morocco and South Africa accounted for 92.9% of vehicles produced on the continent in 2019, followed by Algeria and Egypt. Only six percent of auto inputs come from Africa and are concentrated in a few countries, including Botswana, Cote d’Ivoire, Egypt, South Africa and Tunisia. The main inputs are in the areas of electrical machinery, iron and steel, plastics and rubber.
Problems facing the expansion of auto manufacturing on the continent as well as the relevant power industries include the import of used cars, so Africa is a market for 40 percent of the cars from Japanese opportunities, inadequate tax deals and lack of investment incentives. In this regard, UNCTAD recommends setting a maximum age and technical specifications for imports of used cars, noting that until July 2020, 20 countries applied a maximum age of up to 20 years, while 30 countries didn’t.