AfCFTA: Big economies afraid of ‘cheating’, says ECA’s David Luke

At the recent 22nd meeting of the Intergovernmental Committee of Experts (ICE) in Kigali David Luke, Coordinator of the African Trade Policy Centre at the Economic Commission for Africa (ECA), explained modalities on goods and implications under the African Continental Free Trade Area (AfCFTA) agreement.

Later, he spoke to Business Times’ James Karuhangaabout issues to be resolved before completing phase one of negotiations, approaches to adopt for liberalising trade in goods under the deal and explained why big countries fear they could be cheated.

The excerpts:

What, really, are the benefits of this agreement?

It is intra-Africa trade that will grow. It is important because when we are trading among ourselves we are trading more value added products. Even if it is ugali [maize flour] going across the border, it is not the corn from the field. Each time you mill, process, package, label and so forth, there is somebody doing that job and earning. When we trade with the rest of the world what tends to happen is we just send the raw commodities because this is what they want. They do the processing themselves. Each time you do that, you are losing so many jobs.

Can you put figures to this benefit? What do Africans need to know about the big benefits you talk about?

The low ambition scenario points to $28 billion increase for the whole of Africa; while in the high scenario we say $44 billion increase, in GDP. For the high ambition scenario [full liberalization], $40 billion in exports and $56 billion in GDP.

You said there are issues to be resolved in the first phase of negotiations. What are they?

Basically, there are three issues to complete phase one. The first is to agree on the rules of origin. The second is the market access offers which every country has to make for trade in goods, and third is the market access offers for the trade in services.

With the rules of origin, if you create a Free Trade Area, it means that the goods traded in the free trade area have to originate in that free trade area. The goods will qualify for the preferential treatment for the lower tariffs in the area if they originate from countries that are party to the free trade area. There are many ways of developing rules of origin for a free trade area and the simplest is to say that any good which meets, for example, a threshold of 30 percent, originating from the area qualifies.

Then what is complicating things on the agreement?

What has complicated the rules of origin for the AfCFTA is that a number of countries, big countries that are especially in Southern Africa, and Nigeria, are afraid of cheating.

How can this be, or who would be cheating them?

They don’t want a situation where, for example, China or India makes a deal for example with a small country to say that ‘goods coming from China will qualify because they made some small changes here and there.’ In some cases quite frankly, they just change the label on the product and put a local label and send it as qualifying.

To avoid this, they want product-specific routes and not across-the-board cumulation of 15 per cent or 30 per cent, or any other. What this means is, in the customs declaration, there are about 6,000 tariff lines for all products. There is a whole classification in customs and it is called the harmonised system used worldwide. The difficulty with that is that obviously it takes time to sit down and agree that for this category this is the minimum that we accept. But it’s much more specific.

If it takes time, how much time are we talking about?

Well, they’ve done about 60 per cent of the work in about two years already. What I am hearing is that it can be done by the middle of next year. In the meantime, they actually agreed not to hold things up as this work is going on; you can trade under the rules of origin of the REC [Regional Economic Community] to which you belong. The EAC has rules of origin and you can use that for goods entering your market, in the interim period. I was not very keen on this approach but when I realised that for big countries and some of their industries, this is so vital for them, to have the confidence and the comfort that nobody is going to cheat, then.

How about the market access offers for trade in goods and the market access offers for the trade in services?

They have already agreed that they will liberalise 90 per cent of tariff lines, which means there is 10 per cent remaining. They haven’t agreed what to do with the 10 per cent. For EAC, they have 100 per cent because of the Customs Union, and you have a few exceptions here and there but basically they’re there.

What the thinking was is that with the remaining 10 per cent a country could be able to say, ‘we are excluding 2 per cent, 3 per cent, 5 per cent for the next 15 years or the next 20 years.’ And the others if you take 8 per cent, this is a sensitive product and this will be phased out in probably over 5 years or so. So, there are two categories. Now, because trade can be concentrated in a few products, if you exclude 1 per cent, you could be excluding the imports, basically. That’s why we say the approach we should take should be double qualification.

What is double qualification?

Double qualification is that 90 per cent of tariff lines does not necessarily mean that you are liberalising 90 per cent of imports because your imports can be concentrated in 2 per cent, or 3 per cent. You can liberalise 90 per cent but really what you are importing, say from Tanzania, is in that 2 per cent or 3 per cent.

What we are saying is; you should liberalise 90 per cent tariff lines and 90 per cent of the imports. If Tanzania is sending something here, say up to 90 per cent of what you are sending will come duty free and you charge the remaining 10 per cent.

 And you tell Tanzania how long this will be so that it is all clear. That’s double qualification. It is double because you are liberalising the tariff lines and you are liberalising imports at the same time. When we did the analysis we found out that if you do double qualification, everybody gains. It is a win-win because Rwanda’s exports to Tanzania are also treated the same way.

Can we put numbers on this envisaged growth?

The baseline we looked at is 2020 because we are expecting that the agreement will be fully in force by then.  Now, if you liberalize just the tariff lines, what we are showing here is that for the GDP growth you are looking at about 0.25 per cent. The exports could grow probably around 1.5 per cent. If you take the double qualification as I explained it, GDP growth will hit around 0.5 percent and export growth will hit almost 2 per cent because by looking at the data even common sense will tell you that if you open up for the imports to increase, trade will increase.

What about the high ambition scenario you mentioned?

In the high ambition scenario, what we are saying is that if you decide to do full liberalization, 100 percent, you will get more trade and GDP will also be higher, above 0.5 percent.

Is it doable, then?

No. The reason why it is not doable is that they cannot, overnight, not have tariff revenues. Any Finance Minister will tell you that they need transition, and time to adjust. When you bring tariff revenue down to zero it means you are not collecting the customs duties. If you [consider] the intermediate scenario, we are saying 90 per cent of tariff lines, 90 per cent of the trade, and that means you are no longer collecting on 90 per cent of the imports.

But what we are saying is that at the same time, you’ll have an increase in GDP. What you need to do is make sure those companies, small businesses and others doing more trade should pay taxes for this increased activity. In other words, move away from taxing trade through custom duties and transition to taxing businesses.

Businesses making money are employing people. Their impact in the economy is more dynamic. What we are saying is, in this GDP growth, you have room to make up for these losses. And as the firms grow, through trade, even your tax revenue grows. We do not show tax revenues here because that’s another issue but what we found is that you can have an increase of about 4 percent of the tax to GDP ratio under even the low ambition scenario.

The 4 per cent is still not up to the 6 per cent that you are losing but, it is overtime. In the meantime, with this 2 per cent loss, governments can do a lot of things. They can borrow, or they can do bonds. Governments have a lot of flexibility to meet their deficit but you want your economy and businesses to be flourishing. Even if there is revenue loss, in the long run the country can recoup.

After the first phase of negotiations, launched in mid-2015, on goods and services, is wrapped up what do we expect in the second phase?

We have three subjects; competition policy, intellectual property, and investment. All three are important. By the way, in the first phase of negotiations, under services there are five priority sectors; transport, communication, tourism, financial services, and business services. This is the minimum they are asking everybody to open up in these five years. This has been agreed.

Back to the second phase of negotiations; and first, when exactly does it begin?

It will begin early next year. Most likely the [next AU] Summit will formally launch the negotiations. But the technical work has started; on a draft protocol in each area, which negotiators can use. They can bring it home and have discussions with stakeholders and then come back to change what they want to change.

Will e-commerce will be included? and, if so, why?

We have been advocating, at ECA, to include electronic commerce. The reason for this is that we can see a big opportunity because of the way technology is changing. But we don’t have common rules yet it is going to be important. We need to make sure that systems in our individual countries can speak to each other to facilitate. In order to do that you need to have common rules, an agreement that as you get into the technology you would ensure that what you are doing is compatible.

So, competition policy is simply that you want to level the playing field. You don’t want big companies or monopolies that take advantage of the market and squeeze others out. You want some discipline on this. If there is a complaint, you can investigate it. 

Under investment, you don’t want a situation where one country goes and, you know, whether outside or within the continent and says ‘if you come and invest here, we give you 10 years tax holiday, we give you 20 years tax holiday and so on.’

Then, intellectual property is simply that our innovations have a legal system in place for protecting them. If you innovate something, you know you are entitled to a patent for it. What you copyrighted or patented in Rwanda you cannot go in Kenya and do the same and forget that this started in Rwanda. You can use it in Kenya but negotiate how to pay royalties.