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Small firms say AfCFTA tariff liberalization may push them out of business

Small firms say AfCFTA tariff liberalization may push them out of business

The East African | 28th March 2024

By Vincent Owino

The African Continental Free Trade Area (AfCFTA) is expected to significantly boost intra-Africa trade when fully implemented, but small businesses in East Africa are not happy about it, as it may not bode well for them.

A survey by the East African Business Council (EABC), a lobby for private-sector players in the East African Community (EAC), shows that small businesses in the region are worried that a full take-off of AfCFTA could edge them out of business, unless they change tack.

Battered by a raft of challenges at home and dissatisfied with the progress in the elimination of intra-EAC trade barriers, the small businesses worry they may not withstand the competition from AfCFTA, which could force many of them to close down.

“Intense competition arising from AfCFTA tariff liberalisation is likely to drive weaker enterprises out of business; unless they scale up their efficiency levels,” EABC says in the survey co-published with the African Export-Import Bank.

AfCFTA, when fully implemented, is expected to reduce to zero 97 percent of tariffs countries charge on goods from across Africa, opening new markets for East African businesses. But, since they are yet to fully exploit the regional market, they are not that excited about the continental customer base.

Theoretically, AfCFTA is projected to boost eastern Africa’s exports to other African countries by at least $1 billion annually, creating up to 1.9 million jobs and lifting 65 million Africans out of extreme poverty, according to estimates by the United Nations Economic Commission for Africa (UNECA).

But with multiple challenges slowing trade even within the EAC, traders are sceptical that the programme will work in their favour and want a speedy end of trade barriers within the region and across the continent to enable them to benefit fully and compete favourably when AfCFTA goes full-scale.

One of the key challenges identified by the EABC study is insufficient testing and certification infrastructure in some EAC partner states, slowing down cross-border business within the region.

“This greatly inconveniences small scale traders, in addition to increasing the cost of doing business. Having shared laboratory facilities at strategic locations across the region could be useful,” says EABC.

In addition to this, majority of the polled traders in the region are still dissatisfied with available cross-border payment options, transport networks, and complain of several non-tariff barriers to trade slowing their access to cross-border markets.

The leading impediments to trade, cited by the regional businesses, include complex customs procedures, transport and logistical issues, standards, sanitary and phytosanitary measures, and transit procedures, the poll shows.

“Dissatisfaction with the payment system is hinged on the high cost of bank transactions and exchange losses arising from conversions to vehicle currencies,” the regional lobby notes.

Currently, all East African countries are net importers from the rest of Africa. Averagely, only 20 percent of member country exports are sold in Africa, while just 19 percent of their imports come from Africa.

In Burundi and Rwanda, the share of imports sourced within Africa is as low as two percent and four percent, respectively, and exports are equally as low, highlighting a significant gap in trade within the continent.

According to EABC’s calculations, in the best-case scenarios, AfCFTA will not just boost East Africa’s trade with the rest of the continent, it will also boost consumer surplus – by lowering commodity prices – and also increase general societal welfare, meaning both businesses and consumers will benefit.

“The positive welfare effects imply that the quality of life of the citizens of the partner states are projected to improve following full tariff liberalisation. This is attributable mainly to increased consumer choices, cost savings for businesses, and market efficiency,” reads the report.

The welfare gains from the free trade area are so great that impact of the drop in tariff revenues that countries will get from cutting import duties is expected to be short-lived and insignificant.

EABC is also hopeful that AfCFTA will come with other benefits that will empower regional businesses to better compete with others from across the continent, ensuring their long-term survival if combined with local governments’ efforts.

For example, the lobby is counting on the Pan African Payment and Settlement System (Papss) to address the difficulties with cross-border payments, as some businesses claim the infrastructure is currently not accessible in some countries.

Also, the lobby believes participation in AfCFTA will improve small businesses’ access to trade financing from the pool of continental financiers committed to supporting intra-Africa trade.

Other tools designed under the free trade programme, including AfCFTA online NTBs reporting and follow-up platform, and the African Collaborative Transit Guarantee Scheme, will help solve underlying trade problems including non-tariff barriers, and transit challenges.

However, to ensure AfCFTA does not kill local businesses, the lobby is urging a raft of measures to advance competitiveness of regional traders, capitalising on the region’s competitive advantage and eliminating trade barriers.

“EAC governments must ensure full operationalisation and accessibility of AfCFTA instruments in all Partner States to reduce the cost and barriers to intra-African trade,” it said. “There is a need for enhanced transparency and accountability by the regional customs authorities to eliminate irregular and ad hoc tariffs, with strict guidelines for customs authorities to follow prescribed tariff rates.”

Additionally, EABC wants the governments to empower the business community with “evidence-based trade information to leverage AfCFTA tariff concessions and trade facilitating instruments.”

It also wants more investments in import substitution, export promotion, and the manufacturing sector to boost the region’s trade balance with the rest of the continent, in preparation for AfCFTA.

 source: The East African