Jonathan Aremu Professor of International Economic Relations Covenant University

1. AfCFTA and Nigerian Private SectorAfCFTA in African Economic IntegrationNACCIMA/ AfCFTA DIALOGUE SERIES /00130th July,2019 Jonathan Aremu • Professor of International Economic Relations Covenant University • Facilitator for Trade, Investment and Competitiveness Policy Commission Nigerian Economic Summit Group (NESG)

2. Outline of Presentation • Africa’s Economic Situation • ConceptualIssues and Phases in Economic Integration • Overview of Economic Integration in Africa • Implementation Issues in the AfCFTA Phase • Conclusion

3. A. Africa’s Economic Situation • Africa accounts for just 2.4% of global GDP. • The continent has approximately 30% of the earth’s remaining mineral resources. • It also has: (a)the largest reserves of precious metals (b) with over 40% of the gold reserves, (c)over 60% of cobalt, and (d)90% of platinum reserves. • Yet Africa is the world’s poorest and most underdeveloped

4. Africa’s Situation (Cont..) Many of the 55 countries are individually small, with populations less than 10 million and GDP also less than $10 billion, making national markets too small for investments’ patronage as well as domestic trade. Intra- African trade is about 12% or less compared with the North America Free Trade Area (NAFTA)it is 40%, and 63% between countries in Western Europe, 30% in ASEAN. Africa remains 3% of global trade and Doha Development Agenda (DDA) of the WTO, AGOA of USA, and the EPAs of EU have not been negotiated to enable Africa’s successful integration into the Global Economy, despite their promises Up till now, Europe and USA are still major destination for African products, Asia and China are becoming more important.

5. Africa’s Situation (Cont..) • Africa is currently infested with: (1)the deepest levels of poverty, (2) lowest share of world trade, and (3) weakest development of human capital and infrastructure, to say the least • Over the years ,African leaders had recognized that cooperation and integration among Member States in the economic, social and cultural fields are indispensable for continental developmental aspirations • This is why the Post-Independence era saw African governments embracing the idea of regional economic integration, initially mainly for political reasons and later as a development strategy to confront the challenges of (a) small markets, (b) land-lockedness and to (c)benefit from economies of scale in production and trade • Without economic integration, the continent risk further marginalization under the existing a multi‐polar world dominated by trading blocs in North America, Europe, and now the emerging markets of South‐East Asia and China.

6. Africa’s Situation (Cont..) (1) As Kenya’s President Uhuru Kenyatta passionately put it: “There cannot be a good reason why it is easier for us to trade with Asia, Europe and the Americas, rather than with fellow Africans.” (2)John Mahama President of Ghana said “It was a dream of our founding fathers to create a continent where people can move freely(with) goods and services across the continent”. Thus, urgent need for economic integration

7. B. Conceptual Issues and Phases of Economic Integration 1.Concepts To demonstrate how economic integration works, under a Free Trade Area (FTA), we assume the following: • Product - A • Price - Dollar • Countries - Nigeria, Egypt and China • Free Trade Area- between Nigeria and Egypt.

8. Country Cost of Production of A ($) Nigeria 50 Egypt 40 China 30 Table 1: Production Cost of Commodity A

9. Country Cost of Production ($) Nigeria 50 Egypt 80 China 60 Table 2: Production Cost of Commodity A with 100% Tariff

10. Country Cost of Production ($) Nigeria 50 Egypt 60 China 45 Table 3: Production Cost of Commodity A with 50% Tariff

11. Country Cost of Production ($) Nigeria 50 Egypt 40 China 45 Table 4: Production Cost of Commodity A with 50% Tariff on France alone

12. 2. Corollaries Three corollaries emerge from the above tables • if neither of the two countries that engage in economic integration produces commodity A, the integration would be of no importance, as both countries (Nigeria, and Egypt) would still have to import the product from the third country (i.e. the rest of the world-China); • one of the countries in the integration arrangement must be a producer of the product inefficiently, i.e. the country is not the lowest – cost in the world (like China), so that by the union partner abandoning the lowest – cost producer (China) and importing from another union partner, a case of trade diversion would occur; and • that both countries (Nigeria and Egypt) engaging in the integration produce the product with one of them better than the other in terms of costs so that the market is secured for the more efficient producer thus leading to Trade Creation

13. 3. Trade Creation and Trade Diversion in Economic Integration a) Trade Diversion • Trade diversion is the substitution of low cost imports from China with less efficient imports from Egypt. • This is possible because tariffs on imports from Egypt will be eliminated while tariffs on imports from China are maintained. • This situation will make the prices for the less efficient imports from Egypt to become cheaper in Nigerian market than from China. • However, the combined welfare on Nigeria and Egypt is likely to be negative (in the short run) because the consumer surplus as a result of lower prices due to the elimination of tariff is likely to be less than the revenue that would be collected on imports from China which is now lost since the products are now to be imported from Egypt

14. b)Trade Creation • Trade Creation on the other hand, is generally considered to be the replacement of producers from Nigeria with imports from Egypt that are more relatively efficient. • By bringing down the barriers to trade between Nigeria and Egypt, the imports from Egypt become cheaper than the ones produced by companies within Nigeria, and those imported from China (since import duty remains on China), thereby creating more trade (i.e. imports) from Egypt • Since consumers are now paying less for the same commodity, there is a sort of welfare gain due to consumer and producer surplus. • Such gain would however depends on whether the trade creation effect is larger than trade diversion.

15. 4. Phases of Economic Integration Above explanations is only on the Free Trade Area (FTA); which is the first phase of economic integration; all the phases are: • An FTA is formed when there is abolition custom tariffs across borders of Member States but each one maintains its own commercial policy against third party; and to ensure effectiveness a  rule of origin for the goods originating from the territory of State Parties are put in place. • A customs union as the next phases" introduces unified tariffs known as common external tariffs (CET) • A common market adds the free movement of services, capital, labor and fiscal union (shared fiscal and budgetary and others policies)to the customs union. • An economic union combines customs union with a common market; work towards common currency; strengthen market mechanisms; establish common policies for structural change and regional development; and macroeconomic policy coordination, including binding for budgetary polices (see Fig. 5)

16. 3 Phases of Economic Integration (Table 5)

17. C. Overview of Economic Integration in Africa • Among the objectives of OAU Charter was to address Africa’s peculiar situation of underdevelopment via economic integration • Solutions to the problems were therefore concretized in the OAU Summits of 1973 and 1976, and the Monrovia Declaration of 1979. • In 1980 the OAU Extraordinary Summit adopted the Lagos Plan of Action, as a major step towards that goal. • The commitments to the Lagos Plan of Action translated into Abuja Treaty, on 3rd of June 1991 when the OAU Heads of State and Government signed the Treaty establishing the African Economic Community (AEC). • The AEC Treaty has been in operation since May 1994 when the required number of instruments of ratification for its coming into force were deposited with the Secretary General of the OAU.

18. 1. Phases of African Economic Community Integration The AEC Treaty is to be executed in six phases as follows: • Stage ICreation of regional blocs (that is, the Regional Economic Communities or RECs) • Stage II Strengthening of intra-regional integration and the harmonization between the blocs • Stage III Establishment of free trade areas and customs unions in each the RECs • Stage IV Creation of a continentalfree trade area and customs union • Stage V Creation of an African common market • Stage VI Establishment of an African economic monetary union and a parliament

19. Fig.2 Roadmap Towards the Economic Integration Phases(Cont..)

20. D. Implementation Issues in the AfCFTA Phase • The Agreement establishing AfCFTA , which came to operation on 30th May, 2019 is a key milestone in Africa’s integration Agenda, covering: (a) trade in goods, (b)trade in services, (c) investment, (d) intellectual property rights, (e)competition policy, (f)possibly e-commerce, and with (g) dispute settlement system to address trade infractions • With this wide scope, AfCFTA is beyond the requirements of the traditional FTA earlier explained • It is being put in place and aligned with the African Union (AU) Agenda 2063 of the “The Africa We Want”; andalso with the United Nations 2030 Agenda. • The key stakeholders and beneficiary of the AfCFTA is the private sector comprising of traders and investors, who are responsible for moving goods and services across borders • However, these opportunities remain potential until a rules-based governance, structure are fully established across Member States

21. 1. Objectives AfCFTA (Article 3) • Boost intra-African Trade • Create a single market for goods and services, facilitated by movement of persons through successive rounds of negotiations • Contribute to the movement of capital and natural persons • Lay the foundation for a Customs Union and other phases of Continental economic integration in line with AEC at a later stage • Resolve the challenges of overlapping memberships among the various regional economic communities (RECs)

22. 2. Specific Objectives: Article 4 For purposes of fulfilling and realizing the objectives set out in Article 3, State parties shall: • Progressively eliminate tariffs and non-tariff barriers to trade goods; • Progressively liberalize trade in services; • Cooperate on investment, intellectual property rights and competition policy and on all other trade-related areas; • Cooperate on customs matters and the implementation of trade facilitation measures in line with WTO/TFA; • Establish a mechanism for the settlement of disputes concerning their rights and obligations; and • Establish and maintain national institutional framework for the implementation and administration of the AfCFTA

23. 3. Position of AU Member States and Nigeria in AfCFTA As Nigeria joined the continental “train” of the FTA, Article 23 of AfCFTA was clear on how the Treaty will come into force by stating the following: • The agreement and the protocols on Trade in Goods, Trade in Services, and on the Settlement of Disputes shall enter into force 30 days after the deposit of the 22nd instrument of ratification (achieved 30th May, 2019). • The Protocols on Investment, Intellectual Property Rights, Competition Policy and any other Instrument……deemed necessary, shall enter into force 30 days after the deposit of the 22nd instrument of ratification. • For any Member State acceding to this agreement, the protocols on Trade in Goods, Trade in Services, and on the Settlement of Disputes shall enter into force in respect of that State Party on the date of the deposit of its instrument of accession • For Member States acceding to the Protocols on Investment, Intellectual Property Right, competition policy, and any other instrument…..deemed necessary, shall enter into force on the date of the deposit of its instrument of accession

24. 4. How and When to Trade under AfCFTA Rules • Only those AU Members which have ratified the AfCFTA (or have subsequently acceded) will be bound and will enjoy the benefits, once the Agreement is in force for them. • The State Parties must also adopt domestic arrangements to ensure that there will be compliance with the commitments undertaken in terms of the AfCFTA legal instruments. • New, continent-wide preferential trade in goods and services and other matters (investment, competition and intellectual property) are to wait till commencement of Stage I of AfCFTA • In the event of any conflict and inconsistency between the AfCFTA Agreement and any regional agreement, this Agreement shall prevail to the extent of the specific inconsistency, except as otherwise provided in this Agreement. • State Parties that are members of other RECs, regional trading arrangements and custom unions, which have attained among themselves higher levels of regional integration than under this Agreement, shall maintain such higher levels among themselves.

25. 5. Principles to Govern AfCFTA Article 5 provided that AfCFTA shall be governed by the following principles: • Driven by Member States of the African Union; • RECs Free Trade Areas (FTAs) as building blocs for the AfCTA; • Flexibility and special and differential treatment to apply; • Transparency and disclosure of information; • Most-Favoured-Nation (MFN) and National Treatment to apply ; • Reciprocity principles to be observed; • Substantial liberalization up to 90%; • Consensus in decision-making; and • Best practices in the RECs, in the State Parties and international Conventions binding the African Union.

26. 6. National Strategies for AfCFTA To fully utilize the opportunities of AfCFTA, each Member State, including Nigeria is expected to develop an AfCFTA Strategy that identifies the key trade opportunities, current constraints, and steps required to take full advantage of the continental African market, such as : • Export review: covering existing intra-African and global trade performance within the context of any existing trade policy framework; • Opportunity sectors: identifying AfCFTA export potential – based on a statistical analysis of AfCFTA market access offers and existing trade potential – and prioritizing target sectors; • Constraints to target sectors: analysis of the constraints faced by exporters in target sectors in their intra-African trade; • Strategic actions for boosting identified target sectors: including solutions to identified constraints, approaches to attracting sector investment, the prioritization of low-cost actions, and the allocation of institutional responsibilities for strategy implementation.

27. 7. Implications of AfCFTA Treaty on Nigeria • Liberalizing trade across borders and pursuing AfCFTA integration initiatives requires that the Federal government adjust her jurisdictional control over: • Matters on trade in goods and services to be in line with her commitments • Related to clearance and customs in line with best practices, • Readiness to forfeit some levels of customs revenue, • Granting rights to private parties from other Member States jurisdictions, • Enforcement of standards about quality, • Issues relating to health and safety standards, • Matters to preventing illicit practices, and • Readiness to adopt the new domestic rules and procedures required by AfCFTA. • The country must also understand that her national trade policies could be disputed and ruled to be in violation of their treaty obligations.

28. 8. Sensitization Another round of nationwide stakeholders’ sensitization, particularly the private sector (as we are doing now ) is required in Nigeria to: • enhance the level of their understanding on issues about AfCFTA and its institutional mechanisms to improve and strengthen active stakeholders’ participation in the implementation process; • promote ownership of AfCFTA initiative in order to strengthen the legitimacy of its implementation across the country; • engage private sector and other stakeholders as well as build consensus with them so as to promote smooth as well as reduce the potential for future conflicts in the implementation process of AfCFTA in Nigeria; and • identify and address the private sector’s genuine concerns in the development and implementation of AfCFTA, and thus establish effective 2-way communication between the sector and the government.

29. 9. AfCFTA and Multi-currency Issue • Cross-border payments in most African countries typically involve a third currency, such as the US dollar, British pound or euro, leading to high costs and long transaction times. • The Pan-African Payment and Settlement System (PAPSS) was formally launched by the African Export-Import Bank (Afreximbank) at the African Union extraordinary summit on July 7 in Niamey, Niger Republic. • It is a platform that will domesticate intra-regional payments, save the continent more than US$5bn in payment transaction costs per annum, and formalize a significant proportion of the estimated US$50bn of informal intra-African trade. • The platform will make it possible for African companies to clear and settle intra-African trade transactions in their local currencies. • This will significantly reduce the dependence on hard currencies in regional trade payments • The PAPSS is a crucial element of the African Union’s work to implement AfCFTA,

30. 10. AfCFTA and Problems of Dumping • Dumping is the practice of selling a product in a foreign country for less than either the price in the domestic country or the cost of making the product. • That is, the product's price is below what it would sell for at home or it may even be pushed below the actual cost to produce. • Thereafter, they may raise the price once they've destroyed the other nation's competition. • Recognizing that dumping, subsidization and import surges, whether originating from the Continent or a Third Country, can adversely affect more than one Member/Partner State within the continent , there are provisions in the AfCFTA Treaty to ensure Member/Partner States to co-operate in the detection and investigation of dumping or subsidization or sudden imports surges and in the imposition of the appropriate measures to curb such practices.

31. 11.Anti-dumping • AfCFTA is expected to prevent dumping through its trade remedies provisions • Though, violations of dumping rules can be difficult to prove and expensive to enforce, the standards as available in the WTO protocols are used • Anti-dumping duties or imposition of tariffs remove the main advantage of dumping; in which a country can add an extra duty, or tax, on imports of goods that it considers to be involved in dumping. • However, since all AU Member States members of the WTO, for a country to use the anti-dumping rule it must prove that dumping existed before slapping on the duties; so as to make sure that countries don't use anti-dumping tariffs as a way to sneak in trade protectionism

32. 12. The Role of the WTO in Anti-dumping • Countries of WTO agree that they won't dump and that they won't enforce tariffs on any one industry or country. • However, to install an anti-dumping duty, WTO members must prove that dumping has occurred; (a)that the dumping harmed its local industry; and (b)that the price of the dumped import is much lower than the exporter's domestic price. • The WTO would then ask for three calculations of this price: • The price in the exporter’s domestic market. • The price charged by the exporter in another country. • A calculation based on the exporter’s production costs, other expenses, and reasonable profit margins. • The disputing country must also be able to demonstrate what the normal price should be; and then institute anti-dumping tariffs without violating the GATT multilateral trade agreement.  • AU/ AMOT is yet to finalize the non-originating material for calculating Rule of Origin. Which can be a source of dumping as well

33. E. Conclusion • The AfCFTA is expected to be a game changer for Africa and a key engine of economic growth, industrialization and sustainable development of the entire continent • This first phase of economic integration is designed in line with the AU Agenda 2063, of “The Africa We Want” and the United Nations 2030 Agenda. • By addressing the fragmentation of African markets, the resulted integrated markets at regional and continental levels will create a conducive environment for efficiency gains from economies of scale and scope, increased competitiveness, better access to, and efficient use of resources, including labour, capital and technologies. • These will culminate in greater diversification of African economies and promotion of continental value chains (CVCs). • The CVCs will in turn would contribute to strengthening Africa’s position in global value chains and more value added contents at all levels

34. Conclusion (Cont..) • Given the significant diversity in the economic configuration of AU Member States, the implementation of the AfCFTA will certainly involve substantial adjustments in Nigeria’s policy management styles so as to overcome potential challenges and seize the opportunities offered by the integrated continental markets. • Therefore, among others, there are the need for: • identification and prioritization of opportunities for value chain development in Nigeria; • a thorough analysis of constraints, including non-tariffs barriers and competitiveness issues faced by businesses and means to address them; • strategic actions to boost identified priority sectors in the country; • a monitoring and evaluation framework for compliances and feedbacks; and • resources mobilization plans to execute AfCFTA institutions that are set up. • Taking also the macroeconomic context into account, all these factors will feed into producing: (a)National Trade Policy, and (b)Sequencing of Nigeria’s Trade Negotiation Strategies