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In Consideration Of Continental Free Trade Area (2)

In our earlier write up in the blog last week we chose to explain further what Continental Free Trade Area is, for our audience to follow the endorsement of President Buhari of Nigeria at the recently concluded AU meeting in Addis Ababa. As a continuation, we want to look at the adjustment cost associated with Free Trade Areas and Trade liberalisation to ensure equitable outcomes for member countries.

Establishing any Free Trade Areas involving the reduction in tariff barriers, if not total removal, which in turn may initially lead to a loss of taxation revenue from international trade. In some cases these losses may be painful and cause difficulties for macro-economic management. Africa’s smaller and lesser endowed economies may fear losing revenue.

It must be noted that Trade induced adjustment experienced by weaker economics are therefore a matter of major concern not only within the sub-regional REC-FTAs, but also within the proposed Pan-Africa Free Trade Areas. Even though the opportunities and benefits of the CFTA will particularly come with significant challenges that most African countries might face in the process of opening their national markets to the whole continent at the long-run, all economies within the Free Trade Area are expected to be transformed and the benefits of  the CFTA shared by countries.

Though the degree of impact will vary in different countries depending on the share of customs revenues in the total public revenue. We make bold to say that in general, the high dependence on customs revenue poses a challenge in sub-regional Free Trade Area and will be more so in the CFTAs. This is why we of Africa Free Zones Association, in every forum where we talk about the development of Free Trade Zones in the continent advocate that attention should be given by host government, and trying to use Free Trade Zone to achieve continental value chain. If African countries move for the value chain through products of Free trade zone, the fear expressed above will vanish.

This will take care of other adjustment cost (fear) which includes production and employment, labour reallocation across sectors, trade facilitation and export diversification cost, skills development and productivity enhancement costs. As these adjustments are inevitable, member countries will need to devise ways to circumvent or reduce them. The challenge at hand, which is majorly why CFTA issue has been on the drawing board since 2012 and pass its dead line of 2017, is identifying policies that help weaker countries to achieve a rapid supply response and minimize social disruption so that they can realise the maximum gains from further liberalization. 

The plan of action towards CFTA or any Free Trade Area should include compensation mechanisms. Experiences in RECs and such as COMESA are worth noting. Example: COMESA established the COMESA FUND which deals with effects of trade liberalisation that may require adjustments, as well with building infrastructure to consolidate the regional markets. The COMESA Fund operates through two windows: an adjustment facility aimed at supporting the efforts of member states in economic reforms in integration and an infrastructural fund to facilitate the development of trade related regional infrastructure projects, ECOWAS under the ECOWAS fund for cooperation, compensation and development (ECOWAS Fund- now the ECOWAS Bank for investment development-EBID), continues to promote cooperate, compensation and integration of West African Countries. It has two specialised subsidiaries, ECOWAS Regional Development Fund (ERDF) and ECOWAS Regional Investment Bank (ERIB). ERID’s main objective is to contribute towards the economic development of West Africa through the financing of projects and programmes of ECOWAS and NEPAD related to transport, energy, telecommunication industry, poverty alleviation, the environment and natural resources. It also aimed to provide support to landlocked countries to ease their access to ports.

We shall be looking further into other issues concerning CFTA as the committee set up by AU sit to do their work.