African States Launch the Operational Phase of the African Continental Free Trade Area Agreement, Creating one of the Largest Common Markets in the World

During the African Union’s 12th Extraordinary Summit in early July, the signatory States of the Agreement Establishing the African Continental Free Trade Area (the “Agreement”), which entered into force on May 30, 2019, launched the Agreement’s operational phase.

The Agreement is pioneering as a truly pan-African agreement tackling barriers to intra‑African trade, and creating one of the largest common markets in the world. It has been ratified by more than 25 African Union Member States, and a further 27 States have signed the Agreement and are expected to ratify, with Nigeria and Benin most recently signing the Agreement on July 7, 2019. Only one of the African Union Member States, Eritrea, has not signed up to the Agreement at all.  Although the impact of the Agreement remains to be seen, projections are promising and many are optimistic that it will have a significant effect on boosting intra-African trade, encouraging investment from within and outside of Africa and enhancing overall the competitiveness of African States’ economies in the continent and in the global market.  The Agreement overlays a complex web of existing regional and international trade agreements in Africa, and stakeholders (including investors) will need carefully to navigate the interactions between these regimes and the protections that may be available to them in the African Continental Free Trade Area going forward.

The African Continental Free Trade Area – Background

The African Continental Free Trade Area (“AfCFTA”) Agreement was negotiated under the auspices of the African Union (“AU”) and entered into force on May 30, 2019 for all States that have ratified the Agreement.[1] The Agreement was first signed on March 21, 2018 in Kigali, Rwanda by a vast majority of African States.[2] Other States subsequently signed.  Nigeria, Africa’s largest economy, was until recently perhaps the most notable absentee, but recently signed the Agreement during the AU Extraordinary Summit in Niamey, Nigeria, on July 7, 2019, together with Benin. Currently, only one of the  AU Member States, Eritrea, is yet to sign the Agreement. During the AU’s Extraordinary Summit on July 7, 2019, the signatory States announced that the secretariat of the AfCFTA will be located in Ghana, and formally launched the operational phase of the Agreement. Trading under the Agreement will begin on July 1, 2020.

The Agreement creates one of the largest common markets in the world, given the African continent’s estimated combined annual GDP of over US$ 2.45 trillion[3] and combined population of more than 1.2 billion people.[4]

The Agreement’s main objective is to “create a single market for goods, services, facilitated by movement of persons in order to deepen the economic integration of the African continent.”[5]  A further purpose of the Agreement is to “resolv[e] the challenges of multiple and overlapping trade regimes to achieve policy coherence, including relations with third parties.”[6] The Agreement covers “trade in goods, trade in services, investment, intellectual property rights and competition policy,”[7] and contains specific objectives which are intended to facilitate the fulfilment of the Agreement’s general objectives, including to: (i) progressively eliminate tariffs and non-tariff barriers to trade in goods; (ii) progressively liberalize trade in services; and (iii) cooperate on investment, intellectual property rights and competition policy.[8]

There are two Phases to the AfCFTA negotiations. Phase I includes the following, which together comprise the Agreement that entered into force on May 30, 2019:

• The Agreement Establishing the AfCFTA, which contains the framework and objectives, and establishes the governing bodies for the administration of the AfCFTA.

• The Protocol on Trade in Goods, which provides for a number of specific measures aimed at the liberalization of trade in goods, including most-favored nation treatment, national treatment after goods have cleared customs, progressive elimination of import duties (or equivalent charges), the identification and elimination of non-tariff barriers, as well as customs cooperation provisions and trade remedies.

• The Protocol on Trade in Services, which sets out measures aimed at the progressive liberalization of trade in services, including provision for the agreement of mutual recognition of standards and criteria for licensing or certification of suppliers, and specific commitments on the protections that States agree to for particular service sectors.

• The Protocol on Rules and Procedures on the Settlement of Disputes, which contains mechanisms for the resolution of inter-State disputes arising in relation to the Agreement.

Left for Phase II of the negotiations, which are to be completed by June 2020, are intellectual property rights, investment and competition policy and commitments on trade in services for 7 non-priority service sectors (there are 5 priority service sectors included in Phase I).[9]

The Impact Of The AfCFTA Agreement On Trade

It is estimated that the AfCFTA may increase trade levels amongst African States by 52.3 percent by eliminating import duties alone (more if non-tariff barriers are also addressed).[10]  This should increase investment flows within Africa and thus support economic development.  A number of other potential benefits have been identified, including access to markets (African and global) particularly for small and medium‑sized companies, intra-African supply chain integration, job creation and an increase of sustainable exports. [11]

Whether or not the AfCFTA achieves these benefits depends largely on its actual implementation, and “what happens next.”

During the AU Extraordinary Summit early July, the signatory States agreed on five operational instruments that will govern the Agreement: (i) the rules of origin determining which goods qualify for preferential market access under the AfCFTA; (ii) a unified digital payment system; (iii) an online negotiating forum for listing products and tariffs; (iv) a system for the monitoring and elimination of non-tariff barriers, and (v) an African Trade Observatory.[12]  However, there are some key issues relating to trade in goods and services that are yet to be agreed, although a schedule for completion has been set by the AU.  These include schedules of tariff concessions (which were to be submitted to the AU Assembly for adoption in July 2019) and the specific commitments for trade in services for the 5 priority service sectors included in Phase I, which are to be submitted to the AU Assembly for adoption in February 2020. There are then also the issues to be addressed during the Phase II negotiations.

Negotiations aside, implementing the AfCFTA Agreement across countries which differ significantly in terms of population, geography, economy, resources, and economic development may prove challenging.  The very fact that the AfCFTA has entered into force in just over a year, however, is itself an indication of the commitment of African States to come to a collective agreement.  Further proof is the US$4.8 million grant to the African Union from the African Development Bank with the specific purpose to “accelerate the momentum of the [AfCFTA].”[13]  There have also been initiatives to engage with the private sector such as the AfCFTA Regional Trade Forum, among other initiatives to generate momentum across the private sector.[14]

The AfCFTA And Investment Protection

The future conclusion and ratification of the Investment Protocol may be beneficial to the promotion and protection of foreign investment in Africa. Of particular interest to investors both within and outside the continent will be the scope of the substantive protections to be provided for in the Investment Protocol as well as the procedural remedies, in particular whether the Investment Protocol will provide for an investor-State dispute settlement mechanism.

The exact impact of the Investment Protocol will depend on the content of the Protocol, which remains to be determined.[15]  If the Protocol continues in the vein of the other recent intra-African agreements on investment signed or under negotiation, it will likely seek to adopt a balanced approach between the rights of the investor and the interests of the host State.

If the current draft of the Pan‑African Investment Code (PAIC), under negotiation at the African Union,[16] were to serve as a model, for example, the Investment Protocol may include certain substantive protections such as the protection against unlawful expropriation, most‑favored nation and national treatment,[17] but not the fair and equitable treatment and full protection and security standards.  Access to investor-State arbitration may also be conditioned on the exhaustion of local remedies.[18]  

While one objective of the Agreement, as stated in its Preamble, is to achieve harmonization and coordination between the various inter-African trade liberalization instruments, the Agreement will not replace regional agreements.  State Parties that are members of other regional communities, customs unions or trading arrangements, and which have attained higher levels of regional integration among themselves, will maintain such higher integration.[19] 

In addition to the protection granted under domestic investment laws or under bilateral investment treaties to which African States are party, African investors investing in other African countries may therefore continue to benefit from one or more regional investment protection agreements, such as the Economic Community of West African States (ECOWAS) Supplementary Act on Investments,[20] the Southern African Development Community (SADC) Protocol on Finance and Investment,[21] and the Common Market for Eastern and Southern Africa (COMESA) Investment Agreement, provided it enters into force.[22]  Depending on what mechanisms are provided for under the Investment Protocol, it will also be interesting to see whether investors can rely on existing regional mechanisms and arbitration rules to resolve investment related disputes arising in relation to the AfCFTA.[23]

Whether the AfCFTA Investment Protocol will include an express provision aimed at resolving any potential conflicts between these various instruments is not known at this stage.  Because the African regional investment agreements differ in many aspects,[24] including their scope of application, the substantive protections granted to investors, and the availability of investor-State dispute settlement mechanism (ISDS), it will be important to monitor whether the AfCFTA Investment Protocol provides additional protections and remedies to investors relative to other investment regimes that would otherwise be applicable to them.

Conclusion

The extent of the impact that the AfCFTA will ultimately have, and whether its full potential is realized, remains to be seen.  That the AfCFTA Agreement has entered into force and its operational phase has been launched are in themselves significant steps, although much will depend on the negotiation of the remaining Phase I issues and of Phase II and, perhaps most importantly, the implementation in each State.  Current and potential investors in Africa should carefully monitor Phase II of the negotiations to understand the scope of the protections and obligations that will be applicable in the post‑AfCFTA Africa.

The interaction between the new protections, rights and obligations under the AfCFTA and existing regional and international regimes is likely to be complex, as explained above.  In the meantime, investors should carefully consider these issues and seek advice to ensure appropriate investment structuring at the outset of an investment to take advantage of available protections, and to ensure maximum clarity as to how and in what fora investment disputes may be resolved.