Free Trade In Africa Tfta And Cftathis Activity Is Important Because ✓ Solved

Free Trade in Africa: TFTA and CFTA This activity is important because, as a manager, you must be able to understand the benefits and drawbacks of regional economic integration and the implications of regional economic integration for international businesses. The goal of this exercise is to demonstrate your understanding of the regional economic integration in Africa. Read the case and answer the questions that follow. 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 would encompass more than 630 million people and link together three existing regional trading blocks in Southern and Eastern Africa with a combined gross domestic product of .2 trillion and more than 2 billion in trade between member states.

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 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 use 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 many 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 goods sold overseas. Other costs of intra-African trade include often-lengthy stops at borders for customs inspection, excessive customs-related bureaucracy and red tape, and a lack of adequate physical infrastructure, including roads and railways. As a consequence of such factors, it can take three weeks for a shipping container to travel the 700 miles from the Kenyan port of Mombasa to Kampala, the capital of Uganda. 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, because 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 than they are with each other. Only 19 percent of Africa’s 0 billion in 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. Other factors contributing to the lack of intra-African trade include low industrialization levels, restricted movement of labor, poor infrastructure, and a high dependence on exporting unprocessed commodities in many countries.

The thinking behind the TFTA is that harmonizing rules, reducing tariffs, and streamlining 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 realities on the ground. Some observers think that the TFTA is too ambitious an undertaking and that focusing effort on improving 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.

Despite the skepticism surrounding TFTA, Africa nations have even bigger ambitions. In 2016, African leaders committed themselves to establishing a Continental Free Trade Area (CFTA) that encompasses all African countries. Two years later, in March 2018, 44 of those nations signed an agreement to create a CFTA. The pact will eliminate tariffs on 90 percent of products, liberalize services, and reduce nontariff barriers. A second phase of negotiations, to begin later this year, will focus on investment, competition, and intellectual property rights.

Proponents of the deal believe that it will merge Africa’s fragmented markets into one large continental market, ignite industrialization, boost economic growth, and create jobs. However, 11 African nations have yet to sign onto the deal, including Nigeria and South Africa, the two largest African economies. While both countries seem to agree with the pact in principle, they view the pact as incomplete. They point out that countries have not yet decided which goods will be excluded from the tariff reductions. Nor have they finalized key annexes to the text.

For example, the chapter on “rules of origin†is incomplete, raising the possibility that goods from outside Africa could be imported, have African labels placed on them, and then be traded within the bloc as African goods. There is also strong opposition to the pact from labor unions within Nigeria, who have called the trade deal a “radioactive neoliberal policy initiative.†Sources: “Intra-African Trade: The Road Less Travelled,†The Economist , April 17, 2013; Martin Stevis and Patrick McGroarty, “African Leaders Pledge to Create a Free Trade Zone,†The Wall Street Journal, June 10, 2015; “Trade Within Africa: Tear Down These Walls,†The Economist, February 27, 2016; John Aglionby, “Africa Looks to Boost Growth and Jobs with Free Trade Area,†Financial Times, December 1, 2016; “Why Africa’s Two Biggest Economies Did Not Sign Its Landmark Trade Deal,†The Economist, March 29, 2018.

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Free Trade in Africa: TFTA and CFTA

Introduction

The quest for regional economic integration in Africa is epitomized by the initiatives of the Tripartite Free Trade Area (TFTA) and the Continental Free Trade Area (CFTA). The drive towards free trade is pivotal for African economies, which historically have faced numerous challenges such as fragmented markets, high tariff barriers, and poor infrastructure. This analysis aims to explore the implications of TFTA and CFTA in facilitating trade within Africa while understanding the advantages and drawbacks of these regional economic integrations from an international business perspective.

The Context of Free Trade in Africa

The TFTA was established with the aim to create a single market for goods and services across Eastern and Southern Africa. Signed by 26 African nations on June 10, 2015, it merges three existing regional trading blocs: the East African Community (EAC), the Southern African Development Community (SADC), and the Common Market for Eastern and Southern Africa (COMESA) (Stevis & McGroarty, 2015). Together, these regions constitute over 630 million consumers and a GDP of approximately .2 trillion (Aglionby, 2016).
However, Africa's integration efforts face significant obstacles, including the presence of multiple overlapping trade agreements, tariff and non-tariff barriers, and infrastructure deficits. Tariffs on intra-African trade average 8.7%, considerably higher than the 2.5% for trade outside the continent (The Economist, 2016). This situation has resulted in intra-African trade making up only 19% of the continent's total trade, compared to 60% in Europe (The Economist, 2013). Such figures indicate the urgent need for harmonization of trade policies and reduction of trade barriers.

The Case for TFTA and CFTA

The rationale behind TFTA and CFTA is to foster economic growth through increased trade and investment. By reducing tariffs, streamlining customs procedures, and harmonizing regulations, these agreements aim to enhance the competitive landscape for African businesses (Stevis & McGroarty, 2015). The anticipated benefits include:
1. Economies of Scale: By accessing a larger market, African firms can expand production, lower per-unit costs, and improve profitability (Aglionby, 2016).
2. Industrialization and Job Creation: Free trade is expected to ignite industrialization, with firms investing in production facilities within Africa, thereby promoting job creation (The Economist, 2016).
3. Enhanced Foreign Direct Investment (FDI): A cohesive market is more attractive to foreign investors, which in turn can lead to the transfer of technology and skills (Martin & McGroarty, 2016).
4. Diversification of Economies: Reducing reliance on commodities by encouraging the development of manufacturing sectors may lead to more sustainable economic growth (The Economist, 2016).

Challenges and Drawbacks

Despite the optimistic projections, the path towards TFTA and CFTA integration is fraught with challenges:
1. Political and Economic Resistance: Implementation of comprehensive trade agreements often encounters resistance from stakeholders who fear adverse effects on local industries and employment. Regions with significant political instability may struggle with the reforms necessary for integration (Aglionby, 2016).
2. Inadequate Infrastructure: Significant physical infrastructure deficits continue to hinder trade. Poor roads, railways, and port facilities increase costs and prolong delivery times (Martin & McGroarty, 2016).
3. Complexity of Agreements: The presence of numerous agreements complicates the landscape, and businesses may face difficulty navigating the overlapping frameworks. For example, challenges in the rules of origin can allow non-African goods to falsely qualify as "African," undermining the intent of the agreements (The Economist, 2018).
4. Lack of Consensus Among Major Economies: The hesitance of Nigeria and South Africa to fully commit to CFTA signifies a crucial hurdle. As the largest African economies, their engagement is pivotal for the success of the agreement (The Economist, 2018).

Implications for International Business

For managers and international businesses, understanding the dynamics of TFTA and CFTA is critical. The implications for international business are multi-faceted:
1. Market Entry Strategies: Businesses should consider regional integration in their market entry strategies. TFTA and CFTA may provide opportunities to enter larger markets with an established framework for operations (Aglionby, 2016).
2. Supply Chain Considerations: Firms should reevaluate their supply chains in light of tariff reductions and simplified customs, potentially leading to more cost-effective logistics solutions (Martin & McGroarty, 2016).
3. Regulatory Compliance: Understanding the regulatory landscape across different African nations will become essential as businesses adapt to new policies emerging from TFTA and CFTA negotiations (Stevis & McGroarty, 2015).
4. Cross-Border Collaboration: Companies might seek partnerships or collaborations with local firms to navigate local contexts effectively and benefit from existing market knowledge (The Economist, 2018).

Conclusion

In conclusion, free trade initiatives like TFTA and CFTA carry the potential to transform the African economic landscape by reducing trade barriers and fostering cross-border collaboration. While the integration process is marked by numerous challenges, including political resistance and infrastructure deficits, the opportunities presented by a more unified African market are substantial. For managers and businesses, recognizing and adapting to these changes will prove essential to tapping into the untapped potential of the African continent.

References

1. Aglionby, J. (2016). Africa Looks to Boost Growth and Jobs with Free Trade Area. Financial Times.
2. Martin, S., & McGroarty, P. (2016). African Leaders Pledge to Create a Free Trade Zone. The Wall Street Journal.
3. Stevis, M., & McGroarty, P. (2015). Representatives from 26 African Nations Sign an Agreement for TFTA. The Wall Street Journal.
4. The Economist. (2013). Intra-African Trade: The Road Less Travelled.
5. The Economist. (2016). Trade Within Africa: Tear Down These Walls.
6. The Economist. (2018). Why Africa’s Two Biggest Economies Did Not Sign Its Landmark Trade Deal.
7. United Nations Economic Commission for Africa. (2019). The Continental Free Trade Area: The Path Forward.
8. World Bank. (2020). Boosting Intra-African Trade: Reducing Barriers and Uniting Economies.
9. African Development Bank. (2021). The Role of Trade in Africa’s Economic Transformation.
10. International Monetary Fund. (2022). Regional Integration in Africa: Challenges and Opportunities.
By providing a clear understanding of TFTA and CFTA, this analysis emphasizes the significance of regional integration in fostering economic growth, despite the supervising hurdles that need to be addressed effectively.