DealMakers AFRICA 2020 Annual

AfCFTA, Brexit and COVID-19 – trade between the UK and African nations

by Virusha Subban, Jessica Mutton and Dimitris Mourkas

The triple effect of the African Continental Free Trade Area (AfCFTA), the impact of Brexit, and the harsh impact of COVID-19 on trade in Africa is shaping the future trade and investment relationship between the UK and the continent. The years of deliberation around Brexit added to the geopolitical and economic uncertainty of investing in Africa, especially in terms of finalising the terms under which African countries will now trade with the UK. This trade uncertainty has been exacerbated by the impact of the pandemic, which resulted in a twin supply-demand shock, mass production shutdowns and supply chain blockages. AfCFTA, however, is expected to streamline intra-African trade across the continent and provide exciting opportunities for pandemic recovery and growth, which will also benefit Africa’s main trading partners in other regions, of which the UK is one.

AfCFTA
On 1 January 2021, trading began between African countries that had ratified the AfCFTA agreement and submitted their tariff offers. Trading in products started for the AU member states that had aligned their customs procedures and agreed on the rules of origin for 81% of the tariff lines. All countries in Africa, except for Eritrea, have signed the agreement and 34 countries have ratified it so far, including most of Africa’s major economies (South Africa, Kenya, Nigeria and Ghana, for example). A total of 41 countries (including South Africa, Egypt and Mauritius) and customs unions (the East African Community, the Economic Community of West African States, the South African Customs Union and the Central African Economic and
Monetary Community) submitted their tariff offers, and were ready to trade at the beginning of 2021. The AU has called for other countries to ratify the agreement and submit their offers by the end of June 2021.

In recent years, AfCFTA has provided a strong impetus for African governments to address their infrastructure needs and trade logistics systems, as well as overhaul regulation relating to tariffs, bilateral trade, cross-border initiatives and capital flows.

Both domestic and foreign trade, including trade between the UK and Africa, will benefit from reforms to regulation and trade policies that enhance competitiveness and improve the ease of doing business across the continent.

 

According to Baker McKenzie’s recent research with Oxford Economics – AfCFTA's US$3 trillion Opportunity – there are now unprecedented opportunities for Africa and its trading partners to reap economic benefits on the back of the possible improvements in transport infrastructure, reduction of red tape for cross-border dealings, renewed funding and improved liquidity. AfCFTA will provide the opportunity for African countries to diversify their economies, scale production capacity and widen the range of products made in Africa, in particular boosting the production of manufactured goods (and the potential for multinational companies to set up manufacturing plants on the continent). Closer integration of neighbouring economies is a potential avenue for creating scale and competitiveness through domestic market enlargement, thereby promoting development, and boosting foreign investment through greater efficiency.

 

According to research by Brookings, the untapped export potential from Africa to the UK is large, with significant gaps in apparel (US$165,6 million), electronic equipment (USD 142.6 million), and cocoa products (USD 91.7 million). UK trade with Africa peaked in 2012 at U$51billion, but by 2019 it had almost halved to US$27 billion, representing only 2.4 percent of total UK trade. This shows the potential for increased trade between the UK and African nations, especially if mutually beneficial trade agreements are finalised, allowing the post- Brexit UK to take advantage of AfCFTA’s eventual continent-wide market of around 1,4 billion people.

 

Brexit

One consequence of Brexit was that the UK would lose the benefits of the Free Trade Agreements (FTAs) that the EU had signed with countries around the world, including with various African countries.

 

As such, the UK has spent the last few years negotiating so-called 'rollover agreements' with its African trading partners. Such agreements were intended to reproduce similar, or in some cases improved, trading arrangements to those that are currently in place, and many took effect on 1 January 2021. If agreements were not reached in time, African countries that traded with the UK would begin to trade on World Trade Organisation (WTO) terms at the beginning of this year, resulting in increased tariffs, and trade bottlenecks. Until now, the UK has managed to have arrangements in place which replicate the effects of the existing EU trade agreements with 14 African countries.

 

More specifically, the UK has recently signed an Economic Partnership Agreement (EPA) with the Southern African countries of Botswana, Eswatini, Lesotho, Mozambique, Namibia, South Africa and Mozambique, (SACUM); and Africa’s Eastern and Southern States (ESA), which include Mauritius, Seychelles and Zimbabwe and, once they sign the agreement, Madagascar and Comoros.

 

The East African Community (EAC), an intergovernmental organisation comprising Burundi, Kenya, Rwanda, South Sudan, Tanzania and Uganda, has not yet secured an agreement with the UK. However, Kenya and the UK recently signed an agreement that provides immediate duty-free, quota-free access to goods exported from Kenya to the UK, with Kenya committing to gradual tariff liberalisation of goods (excluding some domestically sensitive products).

 

The UK’s negotiations with Kenya were not without controversy. In September 2020, the EAC reportedly warned that Kenya’s agreement with the UK could impact the EAC’s custom union and its common tariffs. Without an agreement, however, Kenya risked losing its duty free, tariff free access to the UK, to which it exports a substantial number of goods each year. Trade between Kenya and the UK was worth US$397 million in 2018, according to the UN COMTRADE database. Exports from Kenya to the UK include coffee, tea, spices, agricultural products and cut flowers.

 

To protect trade on locally made goods, Kenya’s fellow EAC members Rwanda and Tanzania are also reportedly pursuing bilateral trade agreements which will allow them to access duty and tariff free trade with the UK. However, these were not finalised when Brexit took effect.

Côte d’Ivoire has signed a stepping-stone agreement with the UK, through which the UK has committed to providing immediate duty-free, quota-free access to goods exported from Côte d’Ivoire and, in return, the country has also committed to the gradual tariff liberalisation of goods (excluding sensitive domestic products).

 

The UK has also signed roll-over agreements with Egypt, Morocco and Tunisia.

 

Finally, Cameroon and the UK have signed a Memorandum of Understanding which ensures that the two countries can continue to trade according to the measures stipulated in the current EU-Central Africa EPA, until they sign their roll-over agreement.

 

Ghana has also been negotiating a stopgap trade deal with the UK to protect agricultural exports from the country to the UK, but it was not sealed before the end of last year and WTO terms now apply until a trade agreement is reached. On 31 December 2020, both countries issued a statement saying they had reached consensus on the main elements of the agreement, which is expected to be signed shortly.

 

Engagement is also ongoing between the UK and Algeria but an agreement was not in place by the end of last year. Algeria is not a member of the WTO and UK exports are now subject to partner country national legislation.

 

It is also worth noting that the UK has adopted the EU's "Everything But Arms" trade preferences which means that least developed countries in Africa (for a full list of these countries, see here: https://www.gov.uk/government/publications/trading-with-developingnations ) exporting to Britain enjoy "quota-free access and nil rates of import duty on all goods other than arms and ammunition".

 

Of course, the aim of all these arrangements has been to preserve the same level of access that the EU FTAs afforded to trade between the UK and various African countries. It would be interesting to see, in the future, whether the UK will sign trade deals with individual African countries that go further than what the EU FTAs achieve.

 

COVID-19

To compound matters, the impact of COVID-19 meant that, in order protect their countries, many African governments had to adopt temporary policies that discouraged integrated trade, such as temporary export restrictions, curtailing the movement of goods and closing borders.

 

During the pandemic, the World Bank issued a Guidance Note on trade policy in response to COVID-19, noting that maintaining trade flows was crucial to economic recovery. The Bank noted that free trade was necessary to ensure access to essential supplies, food and agricultural products, for example, and that it was vital for continued economic activity and employment. It stated that a disruption in global and regional value chains would lead to an increase in poverty. The World Bank’s guidance further stated that the focus should be on encouraging intraregional trade flows and implementing favourable tariff agreements for essential items, as well as ensuring that temporary export restrictions were targeted and proportionate.

 

As such, new trade agreements between the UK and African nations, and the integrated free flow of trade brought about by AfCFTA are considered to be essential to pandemic recovery and renewal. Further, COVID-19 impacts have led to a heightened focus on sustainability, with more attention being given to environment, social and governance (ESG) issues in trade transactions.

 

Such policies will further aid the continent to pave the way for a more integrated, sustainable, collaborative approach to trade, and encourage ESG-focused foreign investors, including those in the UK, to gear up to take advantage of the world’s most exciting new free trade area.

 

Subban is a Partner specialising in Customs and Trade with Baker McKenzie Johannesburg. Mutton is a Senior Associate and Mourkas a Knowlege Lawyer, both with Baker McKenzie London.

© 2018 Gleason Publications (Pty) Ltd

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