The official statements are clear: Regional leaders and policymakers want to make the 26-member Tripartite Free Trade Area (TFTA) the main stepping stone towards the gradual establishment of the Continental FTA (CFTA) comprising the 54 members of the African Union. Indeed, during the June 2015 African Union Summit in Johannesburg leaders ambitiously insisted that the negotiations on goods and services for the establishment of the CFTA be concluded by 2017. High-level political will seems to be strong. The challenge, now, is to convert this political will into something more than a paper agreement.
The importance of stakeholder involvement
The real effectiveness any trade agreement (or the expansion of an existing one) ultimately depends on the support and the involvement of the key stakeholders—most importantly the private sector—in the design and the implementation. Surprisingly, the regional private sector has not been vocal about its support for either the TFTA or the CFTA. The absence of vigorous national debates about the pros and cons of these agreements has been quite notable. In many countries, the prevailing attitude of the business community ranges from a cautious optimism to a wait-and-see approach. Perhaps this lack of interest is due to a lack of mobilization or consultation at the local level. Or it could be due to a lack of understanding regarding the stakes and potential benefits from what many consider a top-down process.
These stakeholders will ultimately put pressure on governments to pursue or reject steps to the CFTA. Thus, in order to comprehend how the conclusion of the TFTA negotiations may affect the prospects for the planned CFTA negotiations, it is helpful to have a clear grasp of what these agreements mean for the different stakeholders. In particular, it is useful to understand how the establishment of the TFTA affects the willingness of new members (e.g., the Economic Community of West African States (ECOWAS) or the Economic Community of Central African States (ECCAS) economies) to join or to merge. And how might the TFTA business community react to the inclusions of those new members.
The “coincidence of wants” requirement
The expansion of the TFTA requires a “coincidence of wants” among all the interested parties—members and non-members. Non-members must want to join the TFTA, while, at the same time, the members must be willing to negotiate with potential new members to expand the TFTA. It is therefore important to examine the incentives of the existing TFTA members to expand the existing FTA, in addition to those of the non-members to join it.
Incentives of new members to join (or other blocs to merge with) the TFTA
From the perspective of non-members, the domestic support for joining an existing FTA is driven by the relative strength of the import-competing lobby and the export one. A country that considers participating in the TFTA faces a trade-off between (i) the costs of opening up its own market to the other FTA members, and (ii) the gains from obtaining better (and preferential) access to the FTA’s market. In general, the gains from the latter (i.e., preferential access) increase faster than the losses from the former (i.e., increased competition) as the size of the free trade area rises. It is then very possible that even countries that initially had no interest in participating may become interested when the FTA size becomes large enough. Following that logic, the TFTA would keep expanding until all the 54 countries belong to one super-FTA—the Continental FTA.
Incentives of existing members to expand the TFTA
When deciding whether to expand the size of the FTA, a representative TFTA member compares (i) the market enlargement effect (the gains from getting preferential access to the new member’s market); and (ii) the preference dilution effect (the losses of having to share its original TFTA preferential market with the new member). Think of the analogy of a pie getting larger, but at the same time being shared by more people. If the bloc size is small enough, the gains from the enlargement of the preferential market may be large enough to offset the losses from the dilution of preferences—enough that current members are willing to accept new members. When bloc membership reaches a critical size, however, the current members’ incentives for further expansion may be reduced and could eventually go to zero before the FTA encompasses the entire continent. In other words, a gradual expansion of the TFTA may not automatically lead to the CFTA.
If Egyptian firms, for instance, can already secure preferential access to the dynamic and lucrative South African and Kenyan markets under the TFTA, what are the guarantees that they will still be supportive of further expansion of the FTA—which means having to share that preferential access with the likes of Nigeria? Would their gain from better access to the Nigerian or the Cameroonian markets be enough to compensate their losses from having to share the South African and the Kenyan markets with Nigerian or Cameroonian firms? At some point, some of the TFTA members could start to say, “Our market is big enough.” Including ECOWAS or ECCAS members into the mix could just dilute the trade preferences that they are getting in the SADC (Southern African Development Community), COMESA (Common Market for Eastern and Southern Africa), and EAC (East African Community) markets. The business lobbies in those countries will then resist, or at the very least stop supporting, the move toward the Continental FTA.
The key question
To transform the political will into reality, regional policymakers and negotiators need to address the following question: “How can we ensure that the TFTA is indeed a stepping stone and not a stumbling block towards the Continental FTA?” This is not a trivial question, and the answer is probably not straightforward. Whatever it is, it will definitely require more vigorous stakeholder (private sector, consumers, labor organizations, and CSOs) mobilization or consultation at the national level. In the predominantly mercantilist mindset that currently guides trade policymaking in many countries, the benefit accruing to the consumers in the form of reduced prices and increased product variety is unfortunately often ignored. Systematic awareness-raising activities regarding these types of benefits, accompanied by specific measures to compensate potential losers, could help broaden support for a gradual expansion of the TFTA toward the CFTA.
This blog reflects the views of the author only and does not reflect the views of the Africa Growth Initiative.