Trading Aims: The Value of Africa’s Deep Integration Trade Agreement

Written by | Tuesday, May 17th, 2022

Trade and investment relations with Africa are increasingly important to the European Union’s strategic goals. Given their geographic proximity and historical ties, the EU and Africa should both seek to build the foundations of comprehensive and mutually beneficial economic cooperation – as this would have economic and political benefits in everything from job creation, migration, and security to the green and digital transitions. The EU should engage in such cooperation: it is Africa’s most important trading partner, accounting for around one-third of African trade, and is a vital source of foreign direct investment (FDI) on the continent. Nonetheless, players such as China and Russia have an increasing influence on the African commercial landscape, and could weaken the position of the EU as Africa’s leading economic and political partner.

In this context, EU policymakers should view the recent creation of an Africa-wide market under the African Continental Free Trade Area (AfCFTA) as an opportunity to consolidate and strengthen commercial and geopolitical ties with Africa. The AfCFTA, a flagship project of the African Union’s Agenda 2063, is a blueprint for a prosperous Africa that promotes regional integration and structural transformation as a source of inclusive growth, decent jobs, and sustainable development. Given its comprehensive and ambitious scope, the AfCFTA could be the first large-scale effort at deep integration in Africa. The AfCFTA seeks not only to liberalize intra-African tariffs and other traditional barriers affecting trade in goods (shallow integration) but also to address domestic regulatory measures with respect to services, investment, competition, intellectual property rights, and digital trade (deep integration). The degree of convergence between EU and nascent pan-African regulatory models will be critical to the commercial and geopolitical ties between Europe and Africa. Regulatory convergence can lead to the harmonization of rules of operation and governance, and to an increase in cross-border production chains.

The eventual creation of an African economic community could involve not only a continental customs union with common external tariffs, but also the harmonization of broader economic policies for all African countries. An African customs union and economic community could shift the EU’s engagement with Africa away from trade cooperation with individual countries and towards that with another bloc. The EU has concluded 16 free trade agreements (FTAs) with sub-Saharan African countries and four with North African states – more than any other power. Yet many, if not all, of these agreements have done little to develop rules that would create a level playing field in areas such as services, investment, competition policy, and intellectual property rights. By contrast, China has only signed one FTA with an African country (Mauritius) but exerts its influence on a wide range of trade issues through non-traditional instruments such as memorandums of understanding.

The EU has an interest in ensuring that the AfCFTA creates markets in Africa that are open, fair, rules-based, and competitive. European firms are increasingly concerned that they will be displaced from these markets by Chinese, Indian, Middle Eastern, or Russian rivals that can benefit from lower technical standards for products and direct government support at home. The rules, regulations, and governance of the trading system under the AfCFTA – and its convergence or compatibility with European standards – will therefore determine the competitiveness of European firms in Africa. Moreover, the AfCFTA can create the conditions for new investment opportunities beyond Europe’s traditional focus on the extraction of Africa’s natural resources. With a stronger regulatory framework for investment, competition, and intellectual property rights, European firms could not only capitalize on the size of African markets but also local advantages such as low labour costs and links to production and trade with the rest of the world. In short, Africa could become a global hub for manufacturing and exports. This may be a particularly attractive opportunity in the aftermath of Covid-19, as European firms look to strengthen their supply chains by diversifying them away from Asia and near-shoring them.

The EU and the AU should implement a dual-track strategy that strengthens their traditional forms of trade and pursues a new agenda. The first track will require the EU to harmonize its existing FTAs with African countries and work to align the development aspects of these agreements with the effort enshrined in the AfCFTA to promote African countries’ exports of more sophisticated goods and services. In this way, the EU can build a balanced partnership with Africa. The second track will require the EU to cooperate with African countries on the forms of deep integration laid out in the AfCFTA – starting with services, investment, competition, intellectual property rights, and digital trade. Such a partnership for deep integration will be crucial to creating a level playing field for European countries and firms. Furthermore, the AfCFTA will set a precedent for the international trade system under the World Trade Organization (WTO) that both sides support.

In short, the AfCFTA has created a new layer of complexity in African trade but also new opportunities for mutually beneficial economic cooperation between the EU and Africa. The EU needs to revitalize its trade strategy for Africa in response to the agreement. This is even more crucial due to the impact of Covid-19 – which has hampered trade and FDI flows, and has created incentives to diversify and near-shore global supply chains. The EU also needs to contend with the fact that competition from China and other actors poses an increasing challenge to European companies that operate in Africa. The Union’s efforts in these areas should run along two parallel tracks: the traditional agenda and the new agenda.

First, as to the traditional trade agenda, the EU needs to unify its trading regimes with African countries and ensure they are consistent with the AfCFTA. This undertaking should focus on the revision of rules of origin – which is particularly timely given that the AfCFTA negotiations on this issue will conclude in the coming months. Harmonized rules of origin would be an important building block of the traditional trade agenda. As the AfCFTA lacks a customs union and the sovereignty to negotiate trade policy on behalf of AU members, talks on intercontinental market access will not be possible in the near term. In the meantime, the EU’s attempts to standardize EPAs and DCFTAs should help pave the way for a unified trade policy regime in Africa. The AfCFTA is concerned not just with the expansion of trade but also with upgrades to the structure of trade and FDI. This is important given the empirical evidence that countries trading in complex goods and services have higher GDP growth than those that do not. By ensuring that FTAs create space for targeted industrial policy, the EU would promote economic convergence between Europe and Africa while supporting the development objectives of the AfCFTA.

Second, as to the new trade agenda, there is an urgent need for innovative thinking on how to create new building blocks of a trade regime covering services, as well as its connections to the green and digital transitions. The challenges of the AfCFTA will increasingly concern deep integration. This is an area in which the union’s bilateral EPAs and DCFTAs have room to grow. The EU should learn from these arrangements as it develops a fresh approach at the continental level. Many African countries lack technical expertise and experience in deep integration. Therefore, by providing capacity-building in the form of exchanges of experiences and peer learning, the EU can work with these states to develop a joint understanding of how regulatory cooperation would benefit Africa. As African countries have sometimes perceived EPAs as imposing an EU regulatory model, the union will need to focus on cooperation that is useful for Africa and capacity-building on various approaches to regulation. This would allow African countries to assess the benefits of adopting international standards, pursuing regulatory equivalence initiatives, and implementing effective certification procedures.

The EU can help improve connectivity in Africa by investing in both the soft elements of infrastructure, such as the provision of services and their regulatory underpinnings, and physical infrastructure. And it can engage in cooperation based on capacity-building in areas such as competition policy, intellectual property rights, and digital trade. The EU has a wealth of experience with these issues that can inform and nurture the AfCFTA process. Closer collaboration between Europe and Africa on these topics can help them develop a shared understanding of the regulatory challenges and responses in an increasingly complex global trade regime.

‘Trading Aims: The Value of Africa’s Deep Integration Trade Agreement’ — Policy Brief by Iza Lejarraga — European Council on Foreign Relations / ECFR.

The Policy Brief can be downloaded here

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