AfCFTA Guided Trade Initiative: an evaluation of early experiences

A publication made recently available by the Konrad-Adenauer-Stiftung Institute on its website analyses the results of the Guided Trade Initiative (GTI) based on empirical data gathered from the experiences of participating State Parties and companies. The study documents and provides information on how the GTI evolved, the practical challenges faced by various African States in its implementation and the successes achieved. The purpose is to drew lessons and recommend solutions aimed at facilitating countries that are currently joining the initiative.

The GTI was established by a decision of the AfCFTA Council of Ministers responsible for Trade adopted by Heads of State and Government in February 2022. It is a pilot project whose aim is to kick-start trade among some pre-selected States and goods for which the relevant rules of origin have been agreed. Among such goods, there are ceramic tiles, batteries, tea, coffee, processed meat products, corn starch, sugar, pasta, glucose syrup, dried fruits, and sisal fiber, all of them selected based on their potential for developing regional value chains. The countries initially selected to participate to the GTI were seven (Cameroon, Egypt, Ghana, Kenya, Mauritius, Rwanda and Tanzania), representing the five regions of Africa. The initiative has been progressively expanded to additional African countries, with other that are still in the process of joining.

The purpose of the GTI is to test the readiness of the private sector, and the operational, institutional, legal and trade policy environment under the AfCFTA. In order to coordinate and supervise the initiative, the AfCFTA Secretariat created an Ad Hoc Committee on the GTI. Similarly, the GTI participating States have to establish ad hoc committees to follow up with its implementation at national level.

Among the challenges, apart from the limited knowledge and understanding of the rules of the agreement by companies, there are delays in obtaining AfCFTA certificates of origin (mainly due to the fact that the application process for the AfCFTA certificate of origin is still manual); connectivity gaps in moving goods from the exporting to the importing country; high costs associated to the entry and sale products in the importing country, especially for small/medium companies and vulnerable categories, high compliance costs for standards, registration, certification, licensing, etc.; high storage and distribution costs; and challenges in accessing to trade finance, in particular to secure funds to clear import shipments.

One of the lessons learned from the analysis of the experience of countries participating in the GTI is that it is important to consolidate (aggregate) shipments to reduce freight and logistics costs and enable exporters (especially small ones), in order to benefit from greater economies of scale and to advocate for preferential freight rates. In this regard, the Governments of Rwanda and Cameroon assisted their exporters by providingthem direct air transport for tea and coffee exports destined for Accra at concessional rates, which allowed for faster movement of products and reduced trade costs. Also, countries with a diplomatic commercial presence in the target markets is key. Commercial attaches and commercial representatives can facilitate business-to-business engagement between exporting and importing countries by conducting market intelligence and monitoring, assisting them in identifying new markets and export opportunities, and coordinate sales missions from their home countries.

Another important lesson is the multiplicity of taxes, levies and fees imposed on imports.  The AfCFTA eliminates (progressively) only customs duties, not other taxes, that remain high. In Ghana for instance, which volunteered to be a target market for tea from Kenya, tea and coffee from Rwanda, dried fruits and tea from Cameroon, frozen meat from Egypt, and tuna from Mauritius within the framework of the GTI, such taxes increased considerably the cost of importation, reducing the competitiveness of imported products. We analysed this problem in this post, highlighting the risk for African countries to introduce new export and other levies at the border to compensate for AfCFTA revenue losses, given their high dependance on import duties and trade taxes. The study concludes that consideration should be given to encouraging the country and likely other AfCFTA parties to review their tax regimes.

Regarding the key lessons learned, two of them seem to us particularly relevant:

1)    Usually when there are delays in the clearance of goods, the finger is pointed always on Customs. But Customs are not the only government agency present at borders that causes delays. They are only the last link in the control chain, where many agencies intervene in conducting inspections or documentary controls of goods before thay are released by Customs, like Bureau of Standards, health, veterinary, sanitary and phytosanitary authorities and many others. All these agencies need to cooperate with Customs and coordinate their activitiesamong themselves to minimize cross-border delays. Addressing government reforms only to streamlining Customs processes is a starting point, not the final solution.

2)    trade finance is a major issue in Africa. To trade within the continent on a larger scale, traders (formal and informal ones) need to increase the volumes of goods that they exchange at African borders. This implies the need to produce or purchase more products, which in most cases is not possible due to their limited availability of financial resources. Access to finance (and credit) for African companies needs to be enhanced and requirements for obtain a loan must be simplified, or most of businesses will not be able to trade on an AfCFTA scale. There is a need for developing innovative African-tailored solutions toaddress this problem.