Opening-up the Continent: A Focus on Africa’s Tripartite Free Trade Area (TFTA)
Of the many challenges to doing business in Africa, trade barriers are among the most frustrating. Sizeable export, import and associated costs can push up the cost of goods, while customs and transit bureaucracy – which differs from country to country – add time and expense to the movement of goods across borders and makes business travel inconvenient. With long anticipated launch of the Tripartite Free Trade Area (TFTA) agreement in Sharm El Sheikh Egypt on 10 June 2015, such concerns may eventually become a thing of the past. The agreement establishes a vast economic bloc stretching from Egypt in the north to the tip of southern Africa, with a combined gross domestic product (GDP) of US$1.2 trillion and 625 million aspirational consumers.
This exciting initiative is the culmination of 10 years of negotiations between the Common Market for Eastern and Southern Africa (COMESA), East African Community (EAC) and Southern African Development Community (SADC). An enlarged market with duty-free trading and simplified, harmonized customs, transit and visa procedures should greatly aid the cross-border movement of goods, services and business people to level the commercial playing field for businesses based in the 26 member states. Such improvements can play a critical role in the development of these economies, opening up new markets and encouraging essential foreign investment in industry, commerce and infrastructure. Indeed, one of the pronounced aims is to encourage joint planning and implementation of infrastructure programs such as road, rail, border posts, seaports, air transport, telecommunications and energy. The TFTA is also a major step towards the ultimate goal of a fully inclusive African economic community.
A new level of cooperation
Of course, collective trade agreements are nothing new in Africa. COMESA, EAC and SADC are just three of many such groupings, of varying degrees of sophistication. What makes TFTA different is its sheer scale. This wide, geographic coverage brings together economies with different characteristics that can benefit mutually from each other’s strengths. In southern Africa, for example, many countries rely heavily on extractive minerals, and neighbors within SADC have relatively less need to purchase such commodities from each other, except during times of occasional shortage. It’s a similar story in eastern Africa, where agriculture and coffee production predominates, whereas in the north there is a greater emphasis on oil. By combining these three groups, TFTA gives businesses and consumers greater access to a much wider range of goods and services, many of which may not be readily available in their existing trading zones. Commodities producers, who have traditionally suffered through an inability to add value to basic extracted materials, now have a much larger target audience within Africa. This offers an incentive to horizontally integrate into processing, which should generate higher prices for more developed forms of gold, diamonds and nickel.
Being part of a larger bloc also enhances the negotiating power with other global trading zones, notably the European Union (EU). After a decade of talks, the EU finally reached ‘Economic Partnership Agreements’ with EAC and SADC in 2014 in a bid to usher in improved trade reciprocity. This agreement (which also includes COMESA), provides a solid foundation for a wider agreement for the whole of TFTA. The European Parliament has openly stated that TFTA is an “important” development that could achieve a fairer access to markets for both EU and TFTA countries.
Benefiting both domestic and foreign businesses
Once the TFTA has been fully implemented, companies with manufacturing and other operations within the TFTA area should have a significant competitive advantage thanks to almost complete duty free access to all the 26 countries, which brings down the cost of goods and makes it easier to transport products between member states. And with a growing market of hundreds of millions of consumers within reach – especially the rising middle classes – they can also plan more confidently for the future. One key issue to be ironed out is the concept of ‘rules of origin’ of goods. The three participating trade areas have different definitions of what constitutes a locally-produced item, so these rules will have to be aligned. At the Tripartite meeting in February 2014 in Malawi, it was agreed that where rules of origin among the three free trade areas are common or identical, these will be adopted as Tripartite rules – while acknowledging that further discussions on this topic are necessary.
This article is an excerpt from High Growth Markets: The Annual Outlook.