eBusiness Weekly
The African Continental Free Trade Area came into operation at the beginning of the year but this was just the start of a long process of first eliminating tariff barriers between member states, settling rules of origin, eliminating non-tariff barriers and eventually forming a customs union and single market.
So far 54 of the 55 African Union states have signed the original 2018 agreement, with Eritrea, the sole holdout, expected to sign soon as relations with Ethiopia continue to normalise. But only 36 have ratified the agreement and deposited their instruments of ratification. In SADC we are still waiting for Botswana, DRC, Mozambique and Tanzania to do this, but they do not have a veto since once 22 countries went through the ratification process the AfCFTA could come into force.
Importantly among the ratifiers are the largest African countries in terms of economic size or population: Nigeria (which heads both lists), South Africa, Egypt and Ethiopia have ratified fully and Algeria has ratified but not yet deposited its instrument of ratification. So the 36, while forming just over 65 percent of AU members, include a far higher percentage of both the continental economy and the population, probably over 90 percent of both, which makes the grouping viable from the beginning.
The four SADC members that are still moving forward towards ratification, and they are progressing in other areas of implementation, are among the biggest and most important non-ratifiers with appeals already made for them to move forward.
Freeing trade is a process. The countries that are classified as the least developed countries, 20 of the 36 ratifiers, 12 of the 18 signers yet to ratify and Eritrea, have up to 10 years to eliminate tariff barriers while the rest of us, including Zimbabwe, have up to five years. But it does mean that freeing trade is in effect a decade-long process, rather than something that happens this afternoon, although each year should see more progress.
One of the critical areas to be completed is rules of origin, that is ensuring that it is African goods that benefit from free trade, but quite a bit of the heavy lifting has already been done in regional trade agreements, such as in Comesa which Zimbabwe has already implemented. Things dug out of the ground or grown in a country qualify as of national origin from the beginning, even if the fertiliser for the crops is imported, along with products made solely from these raw materials.
But as every Zimbabwean industrialist is aware, there is usually some input that has to be imported and here percentages of permitted foreign inputs for different categories become important. But one critical area that gives almost immediate benefit is that raw materials and inputs that are used by an industrialist in a member country qualify as being of African origin if they originate in another member. And between them the member states encompass a vast range of raw materials and potential inputs.
The rules of origin will specify where things and raw materials have to come from, but they do not specify the ownership of businesses. A multinational wholly owning an African farm, mine or factory will still meet rules of origin if the raw materials and inputs in its African marketing meet the required percentages of African origin. This has seen, in the EU for example, non-European multinationals building factories in a EU country to benefit from that single market. Their investments and job-creation allow them to buy-in.
While steady progress is being made on eliminating tariff barriers proceeds for the next decade, there must be simultaneous progress on non-tariff barriers. For a start there are labelling requirements, and even the language used in labelling. Again, given clear heads and goodwill, these are less complex than having 55 different sets of national rules might imply.
Many African manufacturers already use European Union labelling rules, because they need to access that market, and since all African countries use one of four international languages – English, French, Arabic and Portuguese – as one of their official languages or permitted commercial languages, this is not impossible.
There are other non-tariff barriers, such as banned additives, permitted degrees of genetically modified crops among the raw materials, and permitted sizing of containers and packages to name just some. Free trade does require common minimum standards if it is to be effective and actually permit trade.
It must also be remembered that eliminating tariff barriers does not eliminate taxes. What it does do is eliminate customs duties, but there are still taxes like excise duties and VAT that everyone, local and foreign, has to pay. So long as these taxes are the same for all goods, local and foreign, they are permitted and can be different in each country. In time an automatic system of calculating different VAT percentages and automatically allocating the collected money to each country will be needed. The EU now has this.
Other areas of progress will be the imposition of a common tariff regime on non-African goods. This will precede the eventual customs union and will be a condition, obviously, of a customs union.
So, in these early days, how should Zimbabwean businesses react, and how should they plan? For a start they need to realise that Zimbabwe is a serious pusher of AfCFTA. We want it, despite living next door to Africa’s largest industrial power, which also happens to be one of Africa’s two largest markets. So our business people and especially our manufacturers have to take this seriously.
Some will be worried about losing their effective monopolies or controlled markets. When you think about it all goods that meet rules of origin will be on what we now call open general import licence. But already, over the last decade and the reintroduction of a correctly-priced national currency, we have learned we can compete. Barriers, in many cases, act against Zimbabwean businesses.
So one big opportunity will be, over the next decade, improving manufactured exports. This means that industrialists will need to be looking to Africa when they need raw materials and inputs to guarantee that they meet rules of origin. That is common already as South Africa is our biggest single source of foreign inputs.
But they will also have to take into account national standards in their markets, and future continental standards, and possibly combine with other business organisations to make sure these standards make trade easier and safer. They can start doing that now when they redesign packaging, and perhaps start including other languages or having packaging designed for different markets.
And then, having done the homework on rules of origin and standards, they have to sell. This will require very hard work. Most consumers, regardless of where they live, prefer familiar brands which may well be local brands. Zimbabweans are a trifle weird in their assumption that foreign is better. In some countries there is an almost xenophobic reaction to foreign goods.
This will place a premium on quality and on pricing. To be exact, the Zimbabwean factory will have to offer the best value for money. To take one curious example, cigarettes. As Africa’s major tobacco producer Zimbabwe obviously has an edge here and in fact already supplies raw leaf to several major continental markets. If local industry plays its cards right it could make half the smokes in Africa, justifying the erection of the factories that make the filters, papers and cardboard for the boxes. WHO might sigh deeply, but we would be using our cost advantages and even telling farmers what varieties they must grow.
Local cigarette makers already produce a range of products for the local market, from fairly high-priced premium brands right down to a basic cigarette that costs about a quarter as much, even after our excise duties which are charged per cigarette, rather than on value. So long as they remain honest, ensuring that the premium product is indeed top of the range and the basic cigarette is at least smokable, they can move into other markets as barriers fall, Smugglers have already introduced smokers in the South African Customs Union to our brands.
This is an extreme example, but shows how Zimbabwean industry will probably have to grow in a free trade area and a future customs union. Free trade stresses that you do not try and do everything but instead concentrate on what you are best at, and where you have cost advantages. For a resource rich country like Zimbabwe that will mean concentrating on making things from what we mine and what we grow, where the inputs come from down the road rather than be shipped over long distances.
This is why that huge new steel mill now being built in Mvurwi starts making so much sense, and the major Chinese investor might well be thinking of his future African market behind a continental tariff wall. He carefully chose not just a country but even a town where almost all his raw materials are basically round corner or on site, and when you are trucking low-value high-bulk goods like iron ore, limestone, coking coal, and even chrome and nickel ores, you want the mines for as much of these as possible visible from your chimneys. Then apply modern cost-efficient and energy-efficient technology. Shipping high-value steel is far less of a cost problem, especially if Zimbabwe fixes its railway lines.
All this metal bashing and crop processing can, coupled with a technical education advantage, lead to other things, like developing new processes, new materials and writing selected software. We are not limited if we use our advantages.
