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STUDY ON THE ESTABLISHMENT OF INTER-RECs’ FREE TRADE AREAS IN AFRICA DRAWING ON LESSONS FROM THE COMESA-SADC-EAC FTA EXPERIENCE . RITD UNECA, ADDIS ABABA, ETHIOPIA May 31 2011. Background. AU creation of RECs as pillars for integration and development in Africa

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ritd uneca addis ababa ethiopia may 31 2011

STUDY ON THE ESTABLISHMENT OF INTER-RECs’ FREE TRADE AREAS IN AFRICA DRAWING ON LESSONS FROM THE COMESA-SADC-EAC FTA EXPERIENCE

RITD UNECA, ADDIS ABABA, ETHIOPIA

May 31 2011

background
Background
  • AU creation of RECs as pillars for integration and development in Africa
  • Hence the creation of five RECs namely UMA) in the North, ECOWAS in the West, EAC in the East, ECCAS in Central Africa, and (SADC) in the South.
  • Three more RECs namely COMESA, Community of Sahel-Saharan States (CEN-SAD), and (IGAD) have received the AU endorsement and have joined the earlier five to bring the AU sponsored RECs to eight.
  • The Lagos Plan of Action of 1980 prescribed the use of the (RECs) as building blocks for regional integration in Africa
background1
Background
  • The Abuja Treaty of 1991 endorsed the use of RECs for regional integration
  • NEPAD formed in 2001 as a strategy for faster development through regional economic integration further buttresses Africa’s bid to accelerate the pace of development
  • UNECA, the AUC and the AfDB all support these development initiatives as Africa’s benchmark achievements and springboards for economic transformation and integration in Africa and for launching Africa into the global geo-politics and economy
  • African leaders and development pundits believe that increased trade ties among RECs through the use of inter-RECs’ FTAs will quickly metamorphose into a Grand intra-Africa FTA to boost intra-Africa trade to quickly realize the continental dream of an African Economic Community and Common Market.
introduction
Introduction
  • Trade has emerged as a formidable instrument for inter-regional cooperation
  • However, Africa’s political and socio-economic upheavals have impaired its capacity and capability to effectively use trade as a veritable instrument of economic growth for her development
  • The immediate post-independence era saw a gradual disintegration of these trans-regional infrastructural facilities owing to perceived attempts at establishing national identity and sovereignty.
  • Currently new political agendas and paradigm shift towards recreating closer ties and cooperation between member countries of regional economic blocs have emerged
  • The formation of the Organization for African Unity (OAU) in 1963 and its later transformation to African Union (AU) in 2001 is one of such efforts at enhancing the continent's economic prosperity
introduction1
Introduction
  • Efforts to fast-track development through regional integration region saw the emergence of more RECs along diverse lines that include common currency affiliations, common language, identical colonial history, and homogeneous geo-political locations
  • The new formations have created conditions for multiple memberships in the RECs, thereby creating new problems in the wake of new orientations in the pursuit of regional integration in the continent
  • The RECs are now seeking closer cooperation through intra- and inter-REC trade by forming trading blocs for faster regional integration and to speed up the establishment of an African Common Market
  • The formation of COMESA and CEN-SAD to cover wider areas and to include more states from existing RECs demonstrates further efforts by African states to expand the frontiers of regional cooperation in trade as a strategy for faster regional integration
  • The AU Ministers of Trade, at their 6th Ordinary Session in Kigali in November 2010, after due assessment of the progress made in the implementation of FTAs and Customs Unions in the various RECs, and guided by the views expressed by ECA, AU and AfDB (2010) in their joint publication - Assessing Regional Integration in Africa IV (ARIA IV), recommended the fast-tracking of the establishment of an African FTA
introduction2
Introduction
  • The EAC, COMESA and SADC Tripartite Summit of October 2008 and the resultant Tripartite FTA Agreement, demonstrate the compelling desire for RECs to forge inter-REC cooperation in trade to enhance regional integration and overall economic emancipation of the continent
  • The 26 in the three RECs have a combined population of 527 million people, a total GDP of US $624 billion, and GDP per capita of US$1,184 (Newsline, 2010), over 58% contribution to GDP, and 57% of the total population of the African Union (COMESA, EAC and SADC, 2009: Ministry of East African Community, 2010)
  • The Tripartite FTA is to be established on tariff-free, quota-free, exemption-free, and should adopt the principle of variable geometry by simply combining the existing FTAs of COMESA, EAC and SADC into a single FTA (COMESA, EAC and SADC, 2011)
  • The Inter-REC FTA is expected to cushion and control internal and external trading shocks; enlarge markets for goods and services for Member States; increase the critical mass of trading facilities; eliminate the problem of multiple memberships; promote inter-REC and intra-African trade; and enhance the economic and social wellbeing of the people in the region
  • The initiative takes place against the backdrop of numerous obstacles to trade internally and externally. Internally, there are protracted political unrests; poor infrastructure including low level of information and communication technology (ICT); paucity of skilled human capacity; lack of political will; complexity of the African trading environment especially with multiple memberships in RECs; and limited domestic capital. Externally, Africa lacks attractiveness for foreign capital and investment flows and the continent remains overly marginalised in the globalized and international scheme of things especially in trade.
  • The Inter RECs’ FTA seeks to address these problems by aiming at a larger market with prospects for economies of scale.
  • This report presents and analyzes the prospects, challenges and possible impacts of establishing inter-RECs’ FTAs drawing from the experience so far in establishing the COMESA-EAC-SADC Tripartite FTA.
introduction3
Introduction
  • The initiative takes place against the backdrop of numerous obstacles to trade imposed by both internal and external forces. Internally, there have been protracted political unrests; poor infrastructure including low level of information and communication technology (ICT); paucity of skilled human capacity; lack of political will; complexity of the African trading environment especially with multiple memberships in RECs; and limited domestic capital. Externally, Africa lacks sufficient attractiveness for foreign capital and investment flows. In addition, the continent remains overly marginalised in the globalized and international scheme of things especially in trade
introduction4
Introduction
  • The study assessed the progress so far made in the COMESA-EAC-SADC Tripartite FTA; identify the challenges and bottlenecks in the process; determine the prospects of other RECs replicating the Tripartite FTA example to form other FTAs; and the potentials of the new FTAs converging to form a Grand Intra-Africa FTA to boost intra-Africa trade.
  • It made recommendations on how to surmount the challenges and obstacles in using inter-REC FTAs to fast-track the formation of the intra-Africa FTA and customs union to achieve the goal of an African Economic Community in line with the Abuja Treaty
aims and objectives
Aims and Objectives
  • This study has been undertaken to analyze the potential impact of inter-RECs’ FTA on African economies, the challenges , the costs, as well as the political and legal implications of the undertaking
  • It further assessed the effect on the inter-RECs’ FTAs of the on-going Economic Partnership Agreements (EPAs) that African countries are currently negotiating with the European Union.
  • The outcome of the study is expected to guide Member States of the African Union in making sound decisions on joining the on-going inter-RECs’ FTA or in establishing new ones.
  • It is hoped that the inter-RECs’ FTAs will eventually merge to form a Grand intra-Africa FTA
specific objectives
Specific Objectives
  • Conduct an overall assessment of the procedure in establishing inter-RECs FTA and the challenges and benefits by drawing from the experience of the on-going COMESA-EAC-SADC Tripartite FTA s.
  • Assess and analyze trade liberalization and facilitation efforts of the REC’s (including progress in the establishment of free trade areas and customs unions) and their implications for intra-African trade.
  • Assess and analyze the likely direction of intra-Africa trade sis following the establishment of inter-RECs FTAs.
  • Assess and make proposals for the establishment of inter-RECs’ FTAs drawing from the experience in the COMESA-EAC-SADC Single FTA.
  • Provide workable recommendations and clear action plans for the establishment of the inter-RECs’ FTA based on the assessments.
  • Analyze government policies and their impact on the inter-RECs’ FTAs.
  • Outline the potential economic, social, legal as well as political implications of African Member States joining the inter-RECs’ FTAs.
  • Discuss the impact of the inter-RECs’ FTA on African economies including rules of origin, revenues, and customs laws.
  • Assess the implications of the on-ongoing EPA negotiations on the inter-RECs’ FTAs in Africa.
justification
Justification
  • The Tripartite RECs is a practical demonstration of an action plan that is geared towards the implementation of the Lagos Plan of Action for regional integration and the Abuja Treaty that prescribed the establishment of African Economic Community by 2028 (Madakufamba, 2008).
  • Inter-RECs’ FTAs represent ideal interventionist models for addressing most of Africa’s perennial trade and regional integration challenges
  • Inter-RECs’ FTAs will promote customs cooperation and trade facilitation; harmonization and coordination of industrial and health standards;; use of simpler and straightforward rules of origin, promote value added in production; relaxation of restrictions on movement of business persons; enhance the use of ICT; development of the cultural industries ; and develop sector strategies to increase the productive capacity of regions . 
  • Inter-RECs FTAs will further improve regional infrastructure and consolidate regional markets through improved interconnectivity in all forms of transport and communication as well as promote sustainable energy supply to enhance the regions’ competitiveness.
  • Finally, through liberalization, harmonization, and facilitation in trade, inter-RECs’ FTAs would eliminate the complex problem posed by multiple memberships, imposition of non-tariff barriers (NTBs), and the imbalances in trade and trading capacities (COMESA, EAC and SADC, 2010b)
theoretical concept
Theoretical Concept

Figure 1. Hypothetical Structure of Proposed FTAs

methodology
Methodology
  • Types of Data
  • Data Collection Techniques
  • Sampling Technique
  • The Survey
    • SADC – Gaborone
    • COMESA - Lusaka
    • EAC –Arusha
    • Trade Ministries in Nairobi and Pretoria
  • Method of Data Analysis
results and discussions
Results and Discussions
  • Procedures and Experience in Establishing inter-RECs’ FTA
    • After the Tripartite Summit in Kampala, Uganda on 22 October 2008 the governments of the three RECs commissioned a team of consultants to undertake a study on the establishment of the single FTA;
    • A Task Force was constituted from the three RECs to complement the work of the consultants.
    • After 14 months of the Summit, the Task Force produced a Draft Report, Draft Tripartite FTA Agreement with 14 Annexes
annexes
Annexes

Annex Table 1. Tripartite Agreement Annexes

Annex 1. Illustrative List of Non Tariff Barriers

Annex 2. Rules of Origin

Annex 3. Customs Cooperation

Annex 4. Transit Trade and Transit Facilities

Annex 5. Trade Remedies

Annex 6. Competition Policy and Law

Annex 7. Standardization, Metrology, Accreditation and Conformity Assessment

Annex 8. Sanitary and Phytosanitary (SPS) Measures

Annex 9. Movement of Business Persons

Annex 10.Intellectual Property Rights

Annex 11.Guidelines for Services Negotiations

Annex 12.Trade Development and Competitiveness Measures

Annex 13. Dispute Settlement

Annex 14.Institutional Arrangements

challenges and potentials in establishing inter recs fta
Challenges and Potentials in Establishing inter-RECs’ FTA

Challenges

  • Low Level of Technology
  • Multiple and Overlapping Memberships (See Figure s 2, 3 and 4)
  • Varying Stages of Economic Integration among RECs
  • Multiple and Undifferentiated Products
  • Lack of Political Will
  • Limited Human Capacity
  • Financial Constraint
slide18

ECCAS

Angola

Sao Tome and Principe

CEMAC

Cameroon, Chad, CAR, Congo Brazzaville, Equatorial Guinea

CEPGL

Burundi, DRC, Rwanda

Figure 3. Member States of ECCAS, CEMAC and ECCAS

slide19

CEN-SAD

CAR, Chad, Djibouti, Egypt, Eritrea, Libya, Morocco, Somalia, Sudan, Tunisia

Libya

Morocco

Tunisia

ECOWAS

Guinea

Gambia, Ghana, Liberia, Cape Verde Nigeria, Sierra Leone

Mauritania

UEMOA:

Benin, Burkina Faso, Cote d’Ivoire, Guinea Bissau, Mali, Niger, Senegal, Togo

UMA

Algeria

Figure 4. Member States of CEN-SAD, UMA, ECOWAS and UEMOA

challenges and potentials in establishing inter recs fta1
Challenges and Potentials in Establishing inter-RECs’ FTA

Potentials

  • Larger Markets, Specialization and Industrialization, and Economies of Scale (Example of Kenya’s Sugar Industry)
  • Trade Liberalization Achievements
  • Infrastructural Development
trade liberalization and facilitation efforts of recs and their impacts on intra africa trade
Trade Liberalization and Facilitation Efforts of RECs and their Impacts on Intra-Africa Trade
  • Trade Liberalization
    • Progress has been made in the removals of tariffs barriers through legislation
    • Not much progress has been made on NTBs because most of them (corruption, bribery, piracy, road blocks) are not subject to legislation
trade liberalization and facilitation efforts of recs and their impacts on intra africa trade1
Trade Liberalization and Facilitation Efforts of RECs and their Impacts on Intra-Africa Trade

Trade Facilitation

  • The primary goal of trade facilitation is to reduce the transaction cost and complexity of international trade for business and improve the trading environment in a region, with a view to optimizing efficiency and effectiveness in government control and revenue collection (COMESA, EAC and SADC, 2009)
  • Inter-RECs’ FTA, hopes to ensure that any insurance taken in one country should be used in other countries in the FTA.

Role of the Customs (See Figures 7a and 7b

slide25

Figure 7a: Completing Customs Certificates

Figure 7a: Completing Customs Certificates

Figure 7a: Completing Customs Certificates

trade liberalization and facilitation efforts of recs and their impacts on intra africa trade2
Trade Liberalization and Facilitation Efforts of RECs and their Impacts on Intra-Africa Trade

Trade Facilitation – The Partner RECs have agreed to:

  • Reduce the cost of processing documents and volume of paper work required for trade among Member States.
  • Ensure that the nature and volume of information required for trade within the FTA does not adversely affect the economic development of or trade among the Member States.
  • Adopt common standards of trade procedures within the free trade area where international requirements do not suit the conditions prevailing among Member States.
  • Ensure adequate coordination between trade and transport facilitation within the FTA.
  • Keeping under review procedures adopted in international trade and transport with a view to simplifying and adopting them.
  • Collect and disseminate information on international development regarding trade facilitation.
  • Promote the development and adoption of common solutions to problems in trade facilitation instruments.
  • Initiate and promote the establishment of joint programmes, for the training of personnel engaged in trade facilitation.
  • Establish and promote one-stop border posts (OSBPs).
trade liberalization and facilitation efforts of recs and their impacts on intra africa trade3
Trade Liberalization and Facilitation Efforts of RECs and their Impacts on Intra-Africa Trade
  • Trade Facilitation
    • Infrastructure -includes transport infrastructure such as roads, railways, waterways and airways; energy (variety of exploitable energy - oil, gas, coal, and hydro and solar energy); ICT, etc. The North-South Corridor (NSC) Programme receives major focus
    • Funding for Infrastructure Development
    • The three RECs organized a High Level Conference on the North-South Corridor (NSC) in Lusaka, Zambia from 6-7 April 2009. The NSC Programme is a flagship programme of the Tripartite FTA programme. It is a Model Aid for Trade Programme engineered by the Tripartite FTA programme to implement an economic corridor-based approach to trade facilitation and reduce the costs of cross-border trade in the sub-region.
    • Pledges for prioritized projects at the conference amounted to US$ 1.2 billion. The DFID is reported to have given UK£ 67 million in support of the prioritized NSC project
trade liberalization and facilitation efforts of recs and their impacts on intra africa trade4
Trade Liberalization and Facilitation Efforts of RECs and their Impacts on Intra-Africa Trade
  • Funding
  • The Tripartite Partner RECs, in collaboration with IGAD organized a major infrastructure development conference in Nairobi on 28th and 29th October, 2010 with financial support from PRO-INVEST.  Captioned “Linking up Eastern and Southern Africa for Sustainable Economic Development”
slide30
Guidelines on the Establishment of Inter-RECs’ FTA with Emphasis on the COMESA-EAC-SADC Tripartite FTA
  • Define Objectives and Principles
  • Define Implementation Procedures
  • Consult Stakeholders
  • Evaluation/Assessment and Comments
  • A careful assessment of the processes and achievements of the Tripartite vis a vis its set objectives and principles shows significant divergences. Some of these deviations are highlighted to serve as a guide for the Tripartite operatives in future and for RECs that will undertake the establishment of other inter-RECs’ FTAs.
  • There is a general feeling that the arrangement and the procedure in setting up the Tripartite FTA might not have given sufficient thought to the cost, time, and resource demands of the programme at its inception.
  • The decision making process for the establishment adopted a top-down instead of a bottom-up approach. Eventually, trying to communicate the idea to the grassroots always faces problems of acceptability and might not receive adequate cooperation.
  • The schedule of activities is somewhat ambitious in terms of the deliverables and the time within which to achieve them. The timelines are considered too tight for an FTA of that magnitude. (DTI, Pers Comm).
  • The deadlines in delivering the outputs of the Road Map have not been met owing probably due to the tightness of the timelines. For example, consultations on the revised tripartite document slated for January 2011 could not hold because Member States had not all submitted their comments on the revised document.
slide31
Guidelines on the Establishment of Inter-RECs’ FTA with Emphasis on the COMESA-EAC-SADC Tripartite FTA

Evaluation/Assessment and Comments

  • The Second Tripartite Summit which was slated for the first quarter of 2011 could not be held and has now been shifted to the second quarter. The launching of the Draft Agreement for negotiations which is to take place during the Second Tripartite Summit is therefore delayed. Similarly, the date for implementation of the Tripartite FTA which was originally slated for 1st January 2012 has now been shifted to 1st January 2013.
  • The original plan to set up the Tripartite FTA by combining the three existing FTAs seems to have been shelved as the formation seems to have started from the scratch. Second, it appears that the principle of variable geometry, which is prescribed, seems to have been ignored. The Tripartite FTA Units are not fully established and functional at the REC Secretariats and this poses a problem in the implementation process.
  • The non-tariff barriers are difficult to identify and eliminate and they vary widely across states and regions and exist on land, sea and air.
expected direction of intra africa trade with inter recs fta
Expected Direction of Intra-Africa Trade with Inter-RECs’ FTA
  • Larger Market for goods and services
  • Economies of Scale
  • Increased Regional and International Trade (See Figure 8)
slide33

Figure 8. Trend in the share of intra-Africa trade in COMESA, EAC and SADC

Source Data: UNCTA. 2010

costs and benefits in establishing inter recs fta
Costs and Benefits in Establishing inter-RECs’ FTA
  • Costs of Integration
    • Direct costs of providing infrastructure
    • Possible job losses from mergers and downsizing
    • Revenue losses from tariff removals or reductions
  • Benefits from Integration
    • Economies of scale
    • Better competitiveness
    • Possible increase in employment
    • Equity in income distribution by adequately compensating losers
government policies and their impact on the inter recs fta
Government Policies and their Impact on the Inter-RECs’ FTA
  • Protectionist Policy
  • Influence of Culture
  • Multiple and Overlapping Memberships
economic social legal and political implications of joining the inter recs ftas
Economic, Social, Legal and Political Implications of Joining the Inter-RECs’ FTAs
  • Economic
  • Social
  • Legal
  • Political
slide37
Impact of Inter-RECs’ FTA on African Economies with Respect to Rules of Origin, Revenues, and Customs Laws
  • Rules of Origin
  •  Revenue
  • Customs Laws
implications of the on going epa negotiations on the inter recs fta
Implications of the On-going EPA Negotiations on the Inter-RECs’ FTA.
  • EU Stand on the Negotiations
  • Positioning Africa in the Negotiation Framework
  • African Union Stand
conclusions
Conclusions
  • The Tripartite FTA has set the pace
  • The prospects of others joining are high and the conditions are favourable
  • There could be challenges but they are surmountable
  • Strong political will is needed to achieve success
  • The expected benefits outweigh the costs and these make the initiative worthwhile and desirable
  • Inter –RECs’ FTA if it gives rise to a Grand Africa FTA and Customs Union will quicken the realization of Abuja Treaty on African Economic Community
recommendations
Recommendations
  • The principle of variable geometry should form the basis for establishing the inter-RECs’ FTAs. In what can be termed “the coalition of the ready and willing ”, the states that meet the requirements for immediate membership within the stipulated time frame should form the FTA. Other states willing to join but have not met the conditions can join later when they fulfill the requirements. This will help speed up the process.
  • Other RECs should be vigorously sensitized to use the experience gained from the Tripartite FTA to form other inter-RECs’ FTAs and through those FTAs form a Grand African FTA and customs union.
  • The establishment of the new FTAs should take advantage of any f symmetrical or homogenous conditions such as common culture and language, common currency, level of trade liberalization and commonality in trade and trade facilitations such as connectivity in transport, energy and information and communication technology.
  • Starting from areas of commonality will reduce the complexity and costs in money and time to be spent in achieving the goal.
  • In establishing the inter-RECs’ FTAs, it is vital to be realistic and avoid ambitious, costly and complex formations. It is advisable to adopt simple, productive, and cost-effective models of integration through development projects based on the region’s comparative and competitive advantages in producing the products and in facilitating their imports, exports and distribution.
  • On international negotiations with particular reference to the EU’s EPA and the WTO trade negotiations, the African Union Commission should as a matter of urgency develop a common African stand and set of rules and conditions on all the issues that relate to Africa and that might impact significantly on the continent’s development. The set of rules and conditions will form the benchmark for Africa which all African states should use as tools for negotiations. In this way, Africa will be proactive and not reactive in global and multilateral negotiations.
  • The manpower shortage in both quality and quantity and their significant contribution to the delays and lagging behind in the implementation process should be addressed by incorporating capacity building in the inter-REC and the intra-Africa FTA Agreements.
recommendations1
Recommendations

8. While the financial support from overseas partners, especially in the infrastructural development is appreciated, the danger of Africa ceding much authority to and becoming over dependent on these foreign agencies cannot be overlooked. It is therefore expedient for Africa to start looking inwards in raising funds for its projects. They can do this through a well organized and coordinated tax system on governments and through the involvement of the private sector.

9.  A thorough situation analysis should always precede the launching of a programme to determine the feasibility and viability of the programme and should include the assessment of quantum of resources available for the execution and the time frame over which to execute the programme. Allowance should be made about contingencies so that programmes do not face delays or the dangers of running out of funds or time midstream.

10. Partners in the FTA should ensure that the negotiations result in a win-win situation for Member States and the participating RECs. Otherwise unfair treatment leading to inequitable distribution of losses or gains will lead to disenfranchisement and unwillingness to cooperate.

11. Compensation and budgetary support as a result of revenue loss occasioned by the inter-RECs’ FTA agreements should be a once-off exercise and time bound to avoid the creation of indolence and over indulgence of states, which could breed inefficiency and uncompetitive trading regimes.

12. Trade agreements in an FTA should prescribe discriminatory interventions in investments and infrastructural development with the aim of supporting highly disadvantaged states and regions as a way to boost their confidence and guarantee fairness.

13. A bottom-up rather than top-down approach should be adopted to ensure that all stakeholders especially those at the grassroots are involved in the planning and conceptualization stage of the programme. This will also correct the disruptive effects encountered in using ministers as programme implementation whose frequent turnovers cause projects built around them to be abandoned or delayed.