Chris Ndibe, MD/CEO, Carlcon Group
Many of the questions that have been forwarded to my mail and to “Ask The Experts” in the Freezonechannel.com, have higher percentage tilting towards the role of FTZ in countries trying to actualise their expectations in the AfCFTA. I have done this piece as a teaser to stakeholders to brainstorm further, knowing that there is best in the chocolate if well served for consumption.
African leaders seeing the need for regional integration for economic transformation and sustainable socio-economic development in the continent reached an agreement in January 2012 to establish a continental Free Trade Area (CFTA) in Africa by 2017. A framework agreement was signed in March 2018, during the African Union Summit in Kigali, Rwanda by 44 countries to bring the AfCFTA into force.
Programme of regional economic integration often proceed with establishment of regional Preferential Trade Agreement (PTA) which can take the form of Free Trade Area (FTA) or customs Union (CU) while FTAs remove tariff and import quotas among members. CU goes further to establish common external tariffs (CEFs) among members in the area. The next stage of integration involves modalities to allow free movement of goods, which creates a common market (CM).
The above is followed by harmonization of competition policies, product standards as well as structural, fiscal, monetary and social policies, leading to the establishment of an economic union (EU). This final stage of the process involves establishment of political and monetary union (PMU). Which entails creation of supra- national institutions, establishment of a Single Central Bank and creation of a single currency and establishment of a monetary union.
Despite championing the agreement and moving for its speedy implementation, Nigeria abstained from signing the agreement in Kigali. The President Nigeria’s position to the need to protect the economy, especially the industries and small businesses, from external pressures and the competition that may lead to closure industries and job losses amidst the teeming youth population.
Economic theory shows that international trade aids growth, competitiveness and welfare improvement through its effects on specializations, production and consumption. Empirical research shows that trade leads to improved industry performance, innovation and reduction of inefficiencies in developing countries (Goldberg and Pavenik 2016).
Trade improves productivity by enabling reallocation of market shares towards more profitable firms and making less profitable firms to go out of business; making individual firms to reallocate more resources toward more profitable products and adopt better managerial practices. Exposure to foreign competition also leads local businesses to reduce inefficiencies and existing resource misallocation, thereby improving their productivity.
At the African Union Summit held in Addis Ababa in January 2012, heads of states of the AU endorsed an action plan on Boosting Intra-Africa Trade (BIAT) and adopted a decision to fast-track the establishment of a CFTA through a 4-step roadmap:
- Finalization of the COMESA-EAC-SADC tripartite FTA by 2014;
- Establishment of the regional FTAs by non-tripartite RECs that reflect the preference of member states between 2012 and 2014;
- Consolidation of the tripartite and FTA and regional FTAs into a CFTA initiative between 2015 and 2016;
- Establishment of the CFTA by 2017 with the option to review the target date according to progress made.
Another development, Agenda 2063 – the Africa We Want, a 50-year vision launched at the AU Summit in January 2015 reflects the strong interest of African leaders in the regional integration agenda. Among others, the aspirations of the agenda include an integrated continent where “free movement of people, capital, goods and services will result in significant increase in trade and investments amongst African countries” (AUC 2015).
Benefits derivable from CFTA
The cornerstone of the CFTA is promotion of industrialization, sustained growth and development in Africa. The agreement is being pursued based on its potential to “boost intra-African trade, stimulate investment and innovation, foster structural transformation, improve food security, enhance economic growth and export diversification.
According to a study by United Nation Economic Commission for African (UNECA), the African CFTA is expected to increase intra-Africa trade by up to 52.3% as a result of tariff reductions, rising to potentially doubling intra-African trade if non-tariff barriers and trade facilitation are also addressed.
Real wages are estimated to increase for unskilled workers in the agricultural and non-agricultural sectors, as well as for skilled workers, and there is expected to be a small shift in employment in agricultural and non-agricultural sectors.
The AfCFTA is expected to increase Africa’s welfare overtime. Notably, the reduction in non-tariff measures and transaction cost are found to contribute significantly to improving welfare gains.
The AfCFTA will lead to export diversification which in turn produces more sustainable growth; an enlarged regional market better attracts FDI; and the promotion of industrial exports that can help catalyse structural transformation. This agreement allows developing countries to export selected products to certain markets at lower tariff rates than the most-favoured nation rates. This tariff rate is called the most-favoured nation (MFN) rate.
These gains are likely to be uneven at country level. In the case of Nigeria, the CFTA is estimated to cause an increase in Nigeria’s total exports, with a structural shift in Nigeria’s economy towards manufacturing and services. This is expected to lead to a total increase in Nigerian economic welfare.
Powering AfCFTA with the Free Trade Zones Scheme
The broad vision of the Economic Recovery and Growth Plan of Nigeria is to turn around the country’s economic performance and lay the foundations for sustained inclusive growth. The objectives of the plan are focused on industrialization, export orientation and improving economic competitiveness.
These goals are in harmony with the aspirations underlying the AfCFTA and are the underlying philosophy of Free Trade Zone Scheme in any country especially the African countries.
Key concerns driving the resistance to the AfCFTA is whether the expected gains will be realised without suffocating the struggling industries. This is also tied to the theoretical argument of whether trade agreements lead to trade creation or trade diversion.
Giving adequate attention to free zones scheme in the country will take care of these fears, more especially with added incentives for competition and innovation as well as continuous search for new opportunities and markets.
Free Trade Zones or Special Economic Zones have both a policy and an infrastructure rationale. The FTZ/SEZ can be a useful tool as part of an overall economic growth strategy to enhance industry competitiveness and attract foreign direct investment (FDI).
Through the Free Zones, governments aim to develop and diversify exports while maintaining protective barriers, to create jobs, and to pilot new policies and approaches (e.g. in Customs, Legal, Labour and Public Private Partnership aspects). Free Zones also allow for more efficient government supervision of enterprises, provision of off-set infrastructure and environmental control.
It will be proper to once again enumerate the economic benefits of free zones; both static and dynamic to enable appreciate the task before the operators/operatives of the Scheme. These include:
- Direct and indirect employment creation and income generation
- Export growth and export diversification
- Foreign exchange earnings
- Foreign direct investment
- Generating government revenues
- Skills upgrading
- Female employment
- Technology transfer
- Backward linkages
- Demonstration effect arising from application of “best practice”
- Regional development.
From the above enumerated benefits therefore, it is obvious that the development of free zone in the country will not only help Nigeria in balancing her trade, but will keep the country’s productivities growing, generate employment and attract foreign direct investment.
The CFTA provides a large market for Nigerian manufactures and services. The Free Zone will boost this aspect, wherein with good incentives and good working environment.
Enlarge regional market provides incentive for inward foreign direct investment (FDI) and cross-border investment needed to spur productivity.
A vibrant and competitive industrial sector is central to job creation and income growth. This is the mantra of the Abuja Treaty and the objective of AfCFTA, of which actualisation can be quickened with the free zones’ activities.
An integration African market facilities dynamic gains form competition with right modelling of country’s FTZ for right product and services at competitive pricing.
The CFTA provides a platform for cooperation on infrastructure development, investment, technology transfer and innovation which will also spur the activities in the free zones.
Greater access to inputs and intermediary outputs which free zone incentive provides reduces the cost of production innovation and sales.
Investment in infrastructure improving the business environment and promoting digital-led growth will position the country in its rightful place in the AfCFTA.
Nigeria is supposed to have begun to trade with the rest of Africa from January 2021, which will open new vistas of opportunities. As a country, our success or failure will be determined by the plans to face the continental single market, so it is with firms with or without good business models.
AfCFTA, the largest trade agreement after the World Trade Organisation (WTO), is believed will open up a $3.4 trillion opportunity for the continent barely trading at 16 percent with each other. For sure, this is too good to ignore.
MD/CEO, Carlcon Group