African continental free-trade deal has a long way to go
Infrastructure constraints and internal disputes between countries, and between governments and companies, loom large over the pact
The African continental free-trade agreement (AfCFTA) is facing several challenges and it could be decades before there is a common market in which tariffs are largely abolished.
The challenges include infrastructure constraints and internal disputes between countries, and between governments and companies, that must be overcome to ensure the free movement of goods, services and eventually capital and people.
The Trade Law Centre says the agreement will bring together all 55 member states of the AU, covering a market of 1.2-billion people, and a combined GDP of $3.4-trillion.
Eritrea is the only country that has not signed the agreement. Trading under the agreement will begin on July 1 2020.
Speaking at the annual tax indaba in Sandton, international lawyer in Old Mutual’s tax division Sayuri Moodliar said the EU has the Rolls-Royce of trade agreements.
It took almost half-a-century before the EU established a single market with harmonised laws that did not conflict with the agreement. However, the intent with the AfCFTA is not to have a single market in which domestic legislation is harmonised, Moodliar said.
“What we are trying to achieve in Africa is to facilitate easier trade between the member countries. The initial issues will be around reducing or abolishing tariffs and getting the free movement of services and goods, and ultimately people and capital. Each will pose its own challenges.”
Julia Choate, senior associate in Bowmans’ tax practice, said the Southern African Customs Union (Sacu) presents a “regional snapshot” of the opportunities and challenges that an African continental free-trade area might face.
Any common market area has to deal effectively with contraventions of the agreement, Choate said. In the Sacu agreement, the revenue-sharing formula seems to present “challenges” in this regard.
Caroline Rheeder, senior manager in Cova Advisory’s customs and excise team, said during the discussion that Sacu members are seemingly bypassing the revenue-sharing formula by imposing duties on goods. “The idea behind such an agreement is to reduce duties, and practices such as this must be avoided. If these practices are not stopped it would clearly present a barrier to trade.”
Choate said that the revenue-sharing formula is calculated regarding the value of intra-Sacu trade. “What we tend to see in practice is that some members impose local levies on imported goods that are not manufactured in their country, and that effectively take the place of customs and excise duties.”
The Sacu agreement provides a specific carveout for certain restrictions on imports in which it is in the national interest to protect aspects such as public health, intellectual property or exhaustible natural resources, but this does not provide a blanket right to tax, Choate said.
The global intention — of having a free-trade area in terms of customs where all the products between member states are treated equally — is eroded when internal duties or domestically imposed levies have the same effect that customs or excise duty may have on hiking the price of goods.
Choate said if internal levies are imposed, for example to protect public health, one would expect to see a positive effect on public health due to the imposition of levies on tobacco or alcohol, for example. “Unfortunately, in the context of Sacu, these internal levies are not particularly effective.”
She referred to studies, notably in Botswana, that have addressed the efficacies of the taxes on alcohol and tobacco in improving public health. The studies have shown that as there is not a great incentive to consume less of these products when prices are increased, there is no effect on public health, noticeably on the youth.
“If you weigh that up against the aim of promoting a common customs area and increasing trade to the benefit of all the participating economies, there is probably valid ground to dispute these levies.”
Khanyisa Cingo-Ngandu, tax director at SNG Grant Thornton, said there will have to be trade-offs, such as lowering withholding taxes to facilitate trade to generate more taxable income. “If trade is hampered by high withholding taxes and high tariffs it is unlikely that there will be any benefits.”
Moodliar said the AfCFTA might suffer the same fate as the Mercosur (Southern Common Market), a South American trade bloc established in 1991. The vision for the trade bloc — the full members of which are Argentina, Brazil, Paraguay and Uruguay — was to have a free-trade agreement and even possibly a single market, she said, but disputes between the countries prevented the complete abolishment of tariffs.
“I think that is something we are probably going to face with the Africa free-trade agreement,” she said.