UNCTAD showcases potential of African Continental Free Trade Agreement

CAIRO – 19 December 2021: The United Nations Conference on Trade and Development (UNCTAD) issued in December a report proposing how the African continent can optimally benefit from the African Continental Free Trade Agreement (AfCFTA), which went into effect early in 2021.

AfCFTA's Role in Reducing Poverty and Income Inequality

The report underlines that 34 percent of African households live below the poverty line. Also, the Gini coefficient - measuring income equality - records 0.4, which means there is a big income gap. The report showcases that "economic growth is inclusive, if there is a simultaneous reduction of poverty and inequality across all segments of the population."

Although the free trade part entails removing tariffs, that is not all. UNCTAD pointed out that for AfCFTA to materialize, large, medium, and small enterprises need to have "good access" to "markets and productive resources." As for workers, they "need to acquire better skills to respond to evolving labour market demands."

The organization equally prioritizes digitalization, financial inclusion, and infrastructure revamp to boost the industrial sector, and as a result exports and intra-African trade. Further, it urges that the AfCFTA's executive document shall regulate movement of goods creating harmony in terms of regulations.

Informal Cross-Border Trade

The report refers to the definition attempt of the 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 done by firms that are part of the informal sector, or by firms operating in the formal sector but use "unofficial routes" entirely evading duties.

Sometimes, evasion is partial by committing "underinvoicing, which entails reporting a lower quantity, weight or value of goods so as to pay lower import tariffs, misclassification, in terms of falsifying the description of products so that they are misclassified as products subject to lower tariffs, misdeclaration of the country of origin and/or bribing customs officials."

The report recommends resorting to satellite data collection, artificial intelligence (AI), and mobile telephone data collection in order to detect informal cross-border trade. Although measures have been taken to facilitate trade, mainly tariff elimination, there are other obstacles. Examples include "the arbitrary application of rules and requirements by border officers for goods eligible for simplified treatment." Also, the simplified trade regime does not wave "the requirement to obtain import and export permits for agricultural goods or animal products," which are costly and hard to acquire.  Moreover, that facilitating regime "does not eliminate immigration or sanitary and phytosanitary measures or value added tax, excise duties and associated processing fees."

The report suggests the following to ease intra-African trade: simplification of customs procedures; reduction of non-tariff barriers associated with informal trade; and, a continental simplified trade regime, including simplified customs documents, simplified clearance procedures, a common list of products, a threshold for the value of consignments and a common passport or pass for traders.

It is noted that 86 percent of African workers are informal, while 30-40 percent and 40 percent of intra-trade in SADC (Southern African Trade Community), and COMESA (Common Market for Eastern and Southern Africa) is informal.

Crises Endurance

Speaking of the impact of pandemic-induced recession on Africa, the continent endured a double hit as it faced a shortage in fulfilling its needs, due to the decline in the production in the United States, Europe, and Asia, while demand on its exports fell. UNCTAD highlighted that the crisis was exacerbated by African countries setting restrictions on the movement of people and goods due to COVID-19. Currently, to achieve recovery and move forward with integration, "rationalizing the industrial sector to support regional value chains, while leveraging the digital economy" are key.

In time of crises, the UNCTAD study proposes relying on the AfCFTA to coordinate a response targeted at small traders. That is because, during the pandemic, "regulations favoured traders with larger consignments and means of transport." Also, costs soared because of amendments to routes, and subsequently, delays.

Human Resources

The report further suggests easing 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 pertinent to cash crops.

Another point of weakness that has to be remedied 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." Equally, to reduce poverty, the share of labor-intensive manufacturing has to rise, while food import dependency has to drop.  

Preparations of cereals, flour, starch, and milk as well as miscellaneous edible preparations are sectors with export potential. Nevertheless, food processing among other industries faces restraints embodied in limited adequate access to electricity, and high transport costs.  

Edge of Intra-African Trade

UNCTAD showcases that intra-African trade has advantages that are lacking in trade between African and non-African countries. According to a survey conducted among medium and high technology manufacturers by UNCTAD and the International Trade Center in 2021, intra-African exports are technologically more advanced. Further, processed goods represent 41 percent of intra-African trade compared to 17 percent of exports to the rest of the world.

Healthcare Sector

UNCTAD underlines that Africa relies on China, India, and the European Union to acquire its needs of medical products, and that such vulnerability became evident during the pandemic when restrictions were put on exports of medical supplies. The organization admits that investments in the sector have increased, but they are still not enough.

"The leading medical supply imports to Africa include disinfectants and sterilizers, medical consumables, test kits and medical and surgical equipment. However, the high average tariff rate of 10.3 per cent applied by countries in Africa on such products restricts access for producers and consumers to affordable medical products. In addition to tariffs, many businesses 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, with the main suppliers being Egypt and South Africa. The other input, glycerol, is not yet produced in a sufficient capacity, and producers of disinfectants rely on imports from outside Africa," the report explains.

Automotive Sector

Investments in the sector hiked from $2.7 billion in 2016 to $4 billion but dropped to $1.1 billion. Morocco and South Africa accounted for 92.9 percent of vehicles produced on the continent in 2019, followed by Algeria and Egypt. Only six percent of automotive inputs come from within Africa, and are concentrated in a few countries, including Botswana, Côte d’Ivoire, Egypt, South Africa and Tunisia. The main inputs are in the areas of electrical machinery, iron and steel, plastics and rubber.

The issues facing the expansion of automotive manufacturing on the continent as well as relevant feeding industries, include the import of used cars, so as Africa is a market for 40 percent of Japanese used cars, inadequate tax agreements, and lack of investment incentives. On that front, UNCTAD recommends setting a maximum age and technical specifications on the imports of used cars, pointing out that until July 2020, 20 countries applied a maximum age of up to 20 years, while 30 countries did not have one.