African policymakers have long sought ways to increase international trade, as a means to integrate the region into the world economy, and as a means to sustained growth to make a permanent dent in poverty. This year, 54 of the 55 countries in Africa became signatories of the African Continental Free Trade Agreement (AfCFTA), an ambitious initiative to generate “vast economies of scale” on an African basis, principally by eliminating 90 percent of tariffs on goods and significantly reducing non-tariff barriers (NTBs) on merchandise and services.
While the agreement is celebrated as an African solution to African problems, it is worth remembering the problems of those who have travelled a similar journey to avoid the same mistakes. This is even more important as trade agreements worldwide show signs of unraveling.
This article analyses two of the most popular free trade agreements in the world, the North American Trade Agreement, NAFTA and the European Union (EU) trade agreements, their challenges, present conditions, and possible implications on the future of AfCFTA.
North American Free Trade Agreement (NAFTA)
The North American Free Trade Agreement (NAFTA) is a treaty entered into by the United States, Canada, and Mexico; it went into effect on January 1, 1994. (Free trade had existed between the U.S. and Canada since 1989; NAFTA broadened that arrangement). On that day, the three countries became the largest free market in the world- the combined economies of the three nations at that time measured $6 trillion and directly affected more than 365 million people.
Why NAFTA Was Formed
About one-fourth of all U.S. imports, such as crude oil, machinery, gold, vehicles, fresh produce, livestock, and processed foods, originate from Canada and Mexico, which are the United States’ second- and third-largest suppliers of imported goods. In addition, approximately one-third of U.S. exports, particularly machinery, vehicle parts, mineral fuel/oil, and plastics are destined for Canada and Mexico. Small businesses were among those that were expected to benefit the most from the lowering of trade barriers since it would make doing business in Mexico and Canada less expensive and would reduce the red tape needed to import or export goods.
Objectives of NAFTA
- Eliminate barriers to trade and facilitate the cross-border movement of, goods and services between the territories of the parties.
- Promote conditions of fair competition in the free trade area (FTA)
- Increase substantially investment opportunities in the territories of the parties.
- Provide adequate and effective protection and enforcement of intellectual property rights in each party’s territory.
- Create effective procedures for the implementation and application of this agreement, for its joint administration and for the resolution of disputes.
- Establish a framework for further trilateral, regional and multilateral cooperation to expand and enhance the benefits of this agreement.
Challenges of NAFTA
- U.S jobs were lost due to the movement of US manufacturing companies to Mexico as a result of cheaper labor in Mexico.
- Wages were suppressed as some companies used the threat of moving to Mexico as leverage against union organizing protests.
- Mexico’s farmers were put out of business due to the cheaper imports from the US
- Maquiladora (Mexican border) workers were exploited with no labor rights or health protection.
- Mexico’s environment deteriorated due to the increased use of fertilizer and other chemicals.
- NAFTA called for free U.S. access for Mexican trucks.
Current NAFTA situation
Donald Trump became President in 2016 and had used the NAFTA problems as a campaign talking point and promised to renegotiate NAFTA which will bring back lost American jobs. President Trump kept his campaign promise and the United States, Mexico, and Canada renegotiated NAFTA on September 30, 2018. The new deal is called the United States-Mexico-Canada Agreement (USMCA), and the three countries signed the agreement on Nov. 30, 2018.The Trump administration wanted to lower the trade deficit between the United States and Mexico, and the new deal changes NAFTA in six areas. The most important is that auto companies must manufacture at least 75 percent of the car’s components in the USMCA’s trade zone as against 62.5 percent obtainable in NAFTA.
The European Union (EU)
The European Union is a unified trade and monetary body of 28 member countries formed in 1993. It eliminates all border controls between members which allows the free flow of goods and people, except for random spot checks for crime and drugs. The EU transmits state-of-the-art technologies to its members. The areas that benefit are environmental protection, research and development, and energy. Any product manufactured in one country can be sold to any other member without tariffs or duties. Practitioners of most services, such as law, medicine, tourism, banking, and insurance, can operate in all member countries. As a result, the cost of airfares, the internet, and phone calls have fallen dramatically.
Objectives of the EU
The European Union’s main objective is to promote peace, follow the EU’s values and improve the well-being of nations. The predecessor of the EU, the European Economic Community (EEC) was created in 1957 in the aftermath of the Second World War. The first steps were to foster economic cooperation: the idea being that countries that trade with one another become economically interdependent and so more likely to avoid conflict.
The European Parliament and other institutions were mandated to monitor the implementation of these objectives are achieved.
The UK joined in 1973 (when it was known as the European Economic Community). Brexit (an abbreviation of “British” and “exit”) is the withdrawal campaign of the United Kingdom (UK) from the European Union (EU). Following a June 2016 referendum, in which 51.9% voted to leave, the UK government formally announced the country’s withdrawal in March 2017, starting a process that is currently due to conclude with the UK withdrawing no later than 31 January 2020. When the UK leaves, it would be the first member state to withdraw from the EU.
Reasons for Brexit
The voting process had two categories of voters, the Leave and Remain voters. The ‘leave’ voters were advocates of Brexit while the ‘remain’ voters advocated for the continued membership of the UK in the EU.
“Leave” voters based their support for Brexit on a variety of factors, including
- European debt crisis: The European sovereign debt crisis was a period when several European countries experienced the collapse of financial institutions, high government debt, and rapidly rising bond yield spreads in government securities. It’s a common perception that the Brexit movement grew during the debt crisis, and campaigns have described the EU as a “sinking ship.”
- Sovereignty: Britain has long been wary of the European Union’s projects such as the common currency, the Euros and Schengen Visa area , which Leavers feel threatens the U.K.’s sovereignty
- Immigration: The UK had to allow free movement of citizens of other member states of the European Union to enable its access to the European Single Market. However, Angela Merkel had led the imposition of immigration quotas for all EU members which could increase the likelihood of terrorist attacks. A Lord Ashcroft (2016) election day poll of 12,369 voters discovered that ‘One third (33%) [of leave voters] said the main reason was that leaving “offered the best chance for the UK to regain control over immigration and its own borders.
- Demographic and cultural factors (Age and education level of voters): It has been argued that the result was caused by differential voting patterns among younger and older people. According to Opinium, 64% of eligible people aged 18–24 voted, whereas 90% of eligible individuals over 65 voted. It is argued that older voters were more likely to vote ‘leave’ due to having experienced life in the UK prior to 1973, when the UK joined the European Economic Community which later became the EU, and this memory as well as any potential nostalgia may have influenced their decision (Arnorsson and Gylfi, 2018). Multiple sources have found a correlation between having a higher level of education and voting ‘remain’, as well as a correlation between having lower educational level and voting ‘leave’. YouGov found that, among those who voted in the referendum, 68% of voters with a university degree voted ‘remain’, whereas 70% of voters educated only to GCSE level or lower voted ‘leave’. (YouGov, 2016).
The African Continental Free Trade Agreement (AfCFTA):
Thus, the world has in recent times seen major economies moving away from free trade agreements and erecting custom and tariff barriers. However, African countries have opted to do away with protectionism and embrace intraregional trade. A significant and historic step was taken on 30 May, 2019, as the African Continental Free Trade Area (AfCFTA) came into effect (The Africa Report, 2019).
Objectives of the Continental Free Trade Area
Contained in the Agreement Establishing the African Continental Free Trade Area are its objectives which include:
- Creation of a single market for goods, services, facilitated by movement of persons in order to deepen the economic integration of the African continent and in accordance with the Pan African Vision of “An integrated, prosperous and peaceful Africa” enshrined in Agenda 2063
- Expansion of intra-African trade through better harmonization and coordination of trade liberalization and facilitation across Regional Economic Communities (RECs) and across Africa.
- Resolution of the challenges of multiple and overlapping memberships and expedite the integration processes.
- Enhancement of competitiveness at the industry and enterprise-level by exploiting opportunities for scale production, continental market access and better reallocation of resources.
Possible Challenges of AfCFTA
With the lessons learnt from the challenges faced by NAFTA and EU trade agreements, outlined below are some of the challenges that could be faced by AfCFTA;
- Sovereignty: An important aspect of national sovereignty is the right to enter into international agreements and to participate in enforcing them. The issue of sovereignty and ceding trade decision-making powers to a centralized body is always challenging. Agreements like the North American Free Trade Agreement (NAFTA) have provisions that can, in some circumstances, compel the signatory nations to change their laws or face sanctions. Worse than that, these trade agreements will cause countries with high standards for the environment, safety, labor protections, and other protections, to lower their standards in order to avoid sanctions. Moving on with AfCFTA will require huge trade-offs from political leaders. They will need to think beyond short-term election cycles and cede autonomy in policymaking. Aligning continental objectives with a domestic agenda is not going to be easy, especially as global populism and nationalism are rising, and protectionist approaches are being advocated.
According to Ronak Gopaldas (2019), Nigeria has a history of open hostility towards foreign multinationals in the telecommunications, mining and retail industries. It has recently banned the import of a host of food, consumer and industrial goods to protect domestic industry. Similarly, Tanzanian President John Magufuli declared war on foreign miners and clamped down on media freedom to quell dissent. Skeptics also point to the xenophobic violence against African nationals in South Africa, and Nigeria’s recent border closure with Benin republic due to rice and tomato smuggling, as examples of what the continent’s leaders will have to contend with. The increase in such incidents is a timely counterpoint to the optimism surrounding the AfCFTA, and highlights how difficult achieving its vision will be.
- Loss of jobs and reduced income: Despite the growing list of benefits, worries remain over the observed competitiveness of most African countries including Nigeria which has lingering power supply and general infrastructure challenges, which could lead to loss of jobs and reduced income due to cheaper imports from countries with advanced manufacturing capabilities such as South Africa and Morocco. Even so, we believe this challenge will be short-term as trade creates long-term benefits that outweigh short-term pains if strategically followed.
- Immigration: As is true of other trade pacts, the AfCFTA free-movement rules will give people access to any member country. In the referendum debate about the UK’s membership of the European Union (EU), a major argument of the Leave campaign is that Brexit would allow more control over the flow of immigrants to the UK from the rest of the EU. Many people are concerned that high levels of immigration may have hurt their jobs, wages and quality of life. With the AfCFTA pact, there will most likely be migration of people to nations with social infrastructure necessary for manufacture of goods. The same thing will apply to the services sector, as nations with highly skilled professionals in healthcare, engineering, litigation and consultancy sectors will dominate the services market in Africa which is likely to favour Nigerians. Over time, the host nation could feel threatened as they are losing their jobs to foreign nationals and could culminate into xenophobic attacks as already seen in South Africa.
- Dumping and re-labeling of products: The AfCFTA rules of origin ensure the preferential market access negotiated is granted to goods wholly produced or ‘substantially transformed’ in an FTA member state and not somewhere else and simply trans-shipped through a member state. Some African countries may connive with some non-African countries with large manufacturing capacity to be used as a channel to dump their products in Africa. The method is to simply re-label those products as being manufactured by an African country in order to take advantage of low tariffs and other benefits of free trade. Dumping has the capacity to ‘kill’ our local industries as they will not be able to favorably compete with the foreign products which despite being based overseas are still cheaper.
- Terrorism: Entering the African free trade zone requires nations to open up their borders with less documentation required to all Africans at a time when widespread violence is posing serious challenges to state sovereignty. States are facing opposition from rebel movements, terrorist groups, vigilante organizations, transnational criminals, and so on. These groups are known for their mobility and they defy borders and national territorial sovereignty. States experiencing armed conflict include Libya, Mali, Niger, Nigeria, Burkina Faso, the Central African Republic, Sudan and the Democratic Republic of the Congo (DRC) which share thousands of kilometers of borders with other nations. Given that the nations will be required to open up their borders in the agreement, free trade and free movement of goods and people across borders could become a real cause for concern.
Following the lessons learned from NAFTA and the EU, to make AfCFTA work, these issues must be analyzed and prepared for by African nations.