African leaders last month gathered to get the ball rolling on a grand free trade area, which will group the current COMESA, SADC and EAC blocs into one integrated market of 26 countries with a combined population of nearly 600 million people. How we made it in Africa asked Standard Bank analyst Simon Freemantle if the plan will work and how it is likely to impact companies in the region.[hidepost=9][/hidepost]
How feasible is the proposed free trade area?
My concern is that it is putting the cart before the horse. With the existing trade blocs of COMESA, SADC and the EAC there are still many regulatory and other issues that have not been fully ironed out. There are also membership issues such as Tanzania, which is a member of both SADC and the EAC. A lot of these issues haven’t been given the necessary attention within the three trade areas, let alone the expanded area. My concern is that it is a bit rushed. The idea of having a harmonised trade and tariff policy across a wide range of African nations would absolutely be positive and beneficial, but I think a lot needs to be done within the three regions themselves before it will have the effect they are hoping for. We need to make sure that by the time it is launched, it has the optimal chance of success and I think we are not there yet.
COMESA, Africa’s biggest trading bloc, is already a free trade area. Can we gather any clues from COMESA as to how successful the proposed grand free trade area will be?
If you look at trade volumes, COMESA has not been particularly successful. However, the reason for this is not because of COMESA itself. The reasons are different. There are huge infrastructure constraints, which make trading between nations very expensive and often unfeasible. There is often also a disconnect between local demand and the local production capacity. For example, there is no country in COMESA, with perhaps the exception of Egypt, that is manufacturing the goods that Kenya is currently importing from outside the continent. Apart from Egypt, there isn’t really much manufacturing capacity within COMESA. So the challenge for these countries is to align the products they manufacture with regional demand. Most of the manufactured and consumer goods are coming in from foreign countries, particularly from China.
Other challenges that need to be addressed include infrastructure and non-tariff trade barriers such as corruption and delays at the ports because of bureaucracy. These costs are most acute for landlocked countries, which are heavily reliant on neighbour states to reach international export markets. The World Bank has estimated that upgrading road linkages between the Central African Republic and the DRC could increase intra-African trade by between $10 billion and $30 billion a year. This really shows how the impediments to more illustrious trade won’t be overcome by easing policy frameworks alone. Clearly, what is holding back regional trade is not necessarily the lack of agreements, there are a plenty of agreements already in place. So unless we address these constraints, COMESA will continue to be modestly successful as will any expansion of the trade bloc. COMESA doesn’t include South Africa, and if you take South Africa out of the equation, inter-African trade really isn’t much to write home about.
How will this expanded free trade area impact businesses in the region? For example, how will a paint manufacturing company in South Africa or an agri-processing firm in Uganda benefit?
If we can somehow align regional infrastructure projects with these expanded trade agreements then there will be a tremendous benefit. But the immediate benefit for a lot of these traders will be fairly small given the fact that they are already trading with their neighbour states. Uganda already has agreements in place with other East African countries, and South African firms are already trading with the rest of the SADC region. It would be difficult to say that the expanded free trade area is going to be game changing and provide immediate opportunities. There may be some down the line. But for now a lot of those opportunities are in the trade blocs that already exist.
Is it a concern that companies based in the larger economies – such as South Africa, Egypt and Kenya – would dominate trade, thereby crushing firms in smaller countries?
That is always a concern, and it has been a big concern within SADC as well as with the EAC when it comes to Kenya. However, we face that challenge more from imports from foreign partners than we do from regional partners. At the moment, the vast majority of goods are being imported from abroad. So if anything, rather import those goods from South Africa, and lock in some of the revenue in the region, than import them from abroad. So I don’t see that as a particularly negative element. There is definitely an argument to say that Chinese imports are stifling regional integration in Africa in a sense that they are not allowing the growth of a very nascent, small-scale manufacturing industry in countries such as Tanzania, Uganda, or Malawi.
Ultimately what I would like to see is more product fragmentation, which is what we’ve seen in South East Asia. A few countries will decide on a product chain, and each country will specialise in an element of that chain. Say, for example, you are producing a vacuum cleaner. Three or four countries will each produce at least one component of that final product. A country like China will then be responsible for assembly and export. Value is therefore captured in several economies, not just in China. I think that is where we need to go in Africa, but that would require a lot of bilateral and multilateral negotiations and prioritisation.