Question

   On June 10, 2015, representatives from 26 African nations signed an agreement pledging to work together to establish a free trade area that would remove or reduce many tariffs and eliminate time-consuming customs procedures between them. Known as the Tripartite Free Trade Area (TFTA), this common market encompass more than 630 million people an link together three existing regional trading blocks in Southern and eastern Africa with a combined gross domestic product of $1.2 trillion and over $102 billion in trade between, member status.

            The existing regional trading blocks are the East African Community, created in 2000; The Southern African Development Community, created in 1980; and an overlapping Common Market for Eastern and Southern Africa, which also took shape in the 1980s. The East Africa Community has made some progress fostering trade between its member’s countries, which include, Kenya, Tanzania, and Uganda. Countries in the Southern African Development Community have a common set of external tariffs, and several member states us the South African rand, the most liquid and widely traded currency on the continent.

            However, the existing patchwork of African trading blocks- there are some 17 in all, with countries being members of more than one- has made it difficult to realize the gains from trade that could flow from an expanded single market. An African firm selling goods on the continent still faces an average tariff of 8.7 percent, compared with a 2.5 percent tariff on excessive customs-related bureaucracy and red tape, and a lack of adequate physical infrastructure, including roads and railways. There are also some vexing local content requirements. The South African Development Community, for example, requires that clothes traded within the region are both manufactured and sourced there to qualify for lower tariffs. However, since few textiles are produced in the region, the rules have stifled trade in garments.

            For all these reasons, African countries are more likely to trade with Europe and America that they are with each other. Only 12 percent of Africa trade is with other countries on the continent. By comparison, some 60 percent of Europe’s trade is within its own continent, as is 40 percent of North American trade.

            The thinking behind TFTA is that harmonizing rules, reducing tariffs, and streaming or removing customs procedures will allow African firms to sell more goods and services to their neighbors, enabling them to achieve greater economies of scale and lower costs, which would benefit all parties to the agreement. On the other hand, such agreements may prove difficult to reach and, if the past is any guide, even more difficult to implement, given political realties on the three existing regional groups would yield more gains. It’s easier, they argue, to reach an agreement between five adjacent member states, as in the case of the East African Community, than 26 very different countries scattered over the entire continent.

** Another Perspective: can be found about the TFTA by going to The Tripartite Free Trade Area and by going to The Tripartite Free Trade Area Agreement

Analyze the case and answer the following questions:

QUESTION 1: Why are African countries more likely to trade with Europe and America than they are with each other?

QUESTION 2: What are the likely gains from trade to be had from TFTA if it is fully implemented as a common market?

QUESTION 3: Why do you think free trade areas established so far in Africa have not lived up to their expectations?

QUESTION 4: What will African countries need to do to make the TFTA a success? What are the likely impediments to doing this?

Answer 1

1.Intra-African trade is challenging due to high barriers to trade. Also due to admin barriers like customs inspection delays and excessive red tape. The region has very poor infrastructure. Another hindrance is vexing local content requirements. There are many restrictions on the movement of labor. There are very low industrialization levels.

2.Currently less than 20% of Africa's trade is intra-Africa, meaning there is ample room for improvement. if the TFTA is fully implemented, that number should rise to somewhere between 40-60% (EU and NA range). Achieving greater intra-African trade would allow countries to benefit from greater economies of scale and lower costs. These are the likely gains from trade.

3. Free trade areas established so far in Africa have not lived up to their expectations.Most countries in Africa so far have maintained an inward-focused approach to trade where lowering trade barriers was a zero-sum game. Howeverthis attitude may be changing. The East Africa Community has made some progress toward intra-bloc trade. Countries in the South African Development community have made some progress as well.

4. TFTA can be made a success. African countries will need a great willingness to get the job done.The fact that 26 countries have signed on to the agreement is a good sign.Recent progress on the smaller bloc & trading alliances is more evidence of a more cooperative outlook in the region.