Policy Implications

disputes that may arise beyond states, such as those between private enterprises and multinationals, for example.

In addition, the multiplicity of languages, legal institutions, and cultures poses challenges in streamlining legal systems across the region. There is a need for a continental body that addresses these challenges and has the authority to mediate and enforce decisions of arbitrations within and across countries. This body should be strongly supplemented by traditional diplomatic or political approaches to resolve disputes. In addition, there is a need for a provision in the AfCFTA agreement that allows arbitration between investors and states over claims of breaches of the trade agreement. This provision could be bolstered by a regional entity that monitors these arbitrations.

These mechanisms are essential to address not only disputes within Africa but also trade conflicts with parties outside the continent. The challenge of enforcing the rules, including border and customs rules, is reinforced by the partially arbitrary nature of the colonial borders in the region, coupled with strong ethnic connections between communities across borders. Disparities in countries’ economic size also pose challenges to impartial enforcement and resolution of trade disputes—as evidenced by Nigeria’s unilateral border closure in August 2019 to block the flow of goods between itself and neighboring Benin, Cameroon, Chad, and Niger. Though trade agreements are accompanied by intricate dispute resolution mechanisms, they are often underused. As the African Union works on developing the dispute settlement mechanisms for the AfCFTA, there is a need to also consider how to increase their use.

Given the ambitious industrialization agenda of the African Union and its members, disputes on rules, particularly the rules of origin, are expected to be recurrent in trading manufactured goods as the AfCFTA becomes more active. This suggests the need to address the challenges associated with origin fraud. In addition to setting the rules of regional trade, African countries need to establish national and regional institutional frameworks to monitor and ensure compliance with the rules and address illicit trade practices when they are reported. The African Union’s recent online initiative to facilitate the reporting of illicit trade and trade disputes—the AfCFTA Non-Tariff Barriers Reporting, Monitoring and Eliminating Mechanism10 — is a step in the right direction.

Policy Implications

The AfCFTA is an ambitious project that requires massive investment in resources, reforms, increased cooperation from members, and relinquishment of some control over national policies. Africa suffers from challenges that most other regions do not face; hence, the AfCFTA requires unprecedented levels of commitment to succeed. The fundamental challenges include the region’s high level of fragmentation and thick borders, both of

which increase the per unit cost of moving things across borders. In addition, Africa, particularly Sub-Saharan Africa, is one of the most distant regions from the large concentrations of the world economy—in North America, Europe, and East Asia—that provide much of the scale in markets and production. To overcome these challenges, the AfCFTA is the best way forward to make Africa the next regional growth frontier and provide strong grounds to engage in GVCs while also strengthening regional complementarities.

The Need for Strong Political Commitment to Regional Integration

With increasing regionalization and the rise of robust regional blocs reigning over global trade, African states operating separately would find it challenging to grow faster and reduce poverty on a large scale. Hence, the first policy implication is to understand the need for and commit to high levels of political commitment to the goals of regional integration.

The overarching policy recommendation for a successful African FTA is for member countries to make a genuine political commitment to the AfCFTA’s goals. Countries should make the regional strategy part of their national policy; otherwise, the AfCFTA agreement remains a policy document with no national implications. Even with the success of all the other technical policy recommendations we often push for—improving regional infrastructure and facilitating business integration—easing NTBs on trade depends on the extent of cooperative political commitment. This often requires the pooling of national sovereignty and giving up some national policy for the larger mutual interest of the region.

Political tensions will always be part of the process. To address these, governments should engage in broad national information programs to introduce the economic benefits of regional integration. Building a strong national coalition among the elites and citizens is essential to maintain support for these goals. Regional policies may gain more traction when they align with national priorities and attract broad local support. This is particularly important in the larger countries, which may have relatively large influence on regional decisions.

The Role of Focused, Coordinated Investment in Infrastructure

The approach to strengthen the integration that is required for a successful AfCFTA should have three parts: improving physical integration, strengthening political cooperation, and facilitating business integration. Although fragmentation and political and geographic factors play key roles, growth in Africa should not be restricted by geographic determinism.

Through focused policies, the costs of distance and fragmentation can be reduced by improved regional infrastructure—roads, air travel, harbors, communication, energy, and financial services—to facilitate easy mobility of goods, services, people, and knowledge. These improvements require investments in the quality and volume of these infrastructures.

Equally important, states must ensure that national infrastructure projects are coordinated with regional frameworks, to maximize the gains and expand the economies of scale from infrastructure investments. Through collaborative frameworks, states need to reduce the administrative time and transaction costs of trading across borders by improving customs procedures, reducing customs clearance times, establishing one-stop shops, and streamlining regulations across borders.

The Importance of Simplifying the Rules

Many of the technical challenges in the AfCFTA rules and procedures are better addressed by building strong political support and commitment to the goals of regional integration. For example, given that each REC has its own distinct rules of origin, some more complex than others, there is a need to streamline and simplify the rules so that they do not restrict trade flows and investment.

Rules of origin that vary across products are likely to restrict the growth of regional value chains and regional industrial trade networks, because production of a single item often requires multiple intermediate inputs with varying rules of origin requirements. The current rules of origin under debate need to be reformed so that they are simple, are consistent across product groups, and do not impose costs on either the firms or the regional entities in administering such rules.

Similarly, given that intra-Africa trade is already low, the exclusion of even a small set of tariff lines could effectively exclude a significant share of imports to a country. Although the agreement toward implementing the double qualification approach is encouraging, there is still a need for an “anticoncentration” clause to restrict the prospects that a few select tariff lines will fall under trade regimes that are not fully liberalized.

The Use of Regional Integration to Address Disparities

It is important to picture what successful regional integration looks like in the context of Africa. This helps to monitor progress and minimizes the misperception common among economic policy circles of mistaking the goals for the end. Regional integration should be considered an instrument to achieve the goals of increasing growth and shared prosperity as well as a positive outcome by itself. A successful AfCFTA, in addition to increasing trade within the region, should not come at the cost of increased economic disparity between regions and should not restrict trade with the rest of the world.

The region’s persistent high economic disparities could be further reinforced with increased trade, whereby the relatively advanced economies could dominate the production and export of goods and services. For the AfCFTA to be successful, there is a need to assess these potential impacts and signal to countries the need to build increased cooperation beyond trade.

As the policy platform shifts from national to regional or continental, it is important to institute a regional framework to address these inevitable disparities in gains and losses that would arise after integration. Regional entities need to provide a cushion for weaker economies so that they are not left behind. This will help to maintain the strength of the FTA as well as the gains from increased trade over the long term.

The emphasis on increasing trade among countries in the region should also not sway countries from further integrating into GVCs. Regional integration in Africa should not fully replace or substitute for trade with the rest of the world. Trade with countries with disparate incomes and production systems often reinforces the transfer of new knowledge and technology, compared with trade with a similar country.

Policy makers need not lose sight of the importance of trading with the rest of the world, including high-income economies as well as the newly emerging economies in Asia, mainly China and India. Integration in the region should serve as the springboard to integrate successfully with the rest of the world. Regional integration can also bring about greater peace and security as well as better bargaining power for the region, which is particularly essential with the rise of regional blocs globally.

Most of the challenges of integration before and after AfCFTA are best addressed by deeper integration within and across economies. The key instrument in deepening and broadening integration is the quality and volume of connective infrastructure and connective services across the region. This will ensure the development of strong production links and the creation and growth of regional value chains. Deeper integration is also the strategy that would ensure that most have access to market infrastructure to benefit from the potentially increasing concentration of production activities in certain places and minimize the risks of economic divergence.

The success of the AfCFTA will depend on two critical factors, one more important than the other: The fundamental challenge is the political economy of regional integration, which determines the extent of state and regional commitment by leaders, elites, and citizens. This in turn determines the second critical factor, which is the choice between more-restrictive or more-liberal rules of origin that will determine the success of AfCFTA.