Tralac | October 2019

Trade in services in the AfCFTA

The African Continental Free Trade Area (AfCFTA) negotiations have reached a critical phase. Member states are currently engaged in negotiations on issues that are essential for trade in goods and services under the AfCFTA to begin. This newsletter focuses on trade in services in the AfCFTA.

Member states have agreed on five priority services – financial services, communication, transport, tourism and business services – and will engage in the negotiations through a request and offer process to make specific sector commitments. This process expected to be completed by January 2020. Member states have also undertaken to develop frameworks for regulatory cooperation. Simultaneously, member states are preparing offers of tariff concessions, and finalising rules of origin negotiations for several products – textiles and clothing, automotives and sugar. Until these negotiations are concluded, and the outcomes implemented, trade under the AfCFTA in goods or services, cannot begin.

The trade in services agenda is a particularly important one for the continent. Services such as communication, transport and financial services are inputs into all economic activities. Services are essential to facilitate trade across borders, they are essential for competitiveness in agriculture and manufacturing – in fact, in all economic activities. Very importantly financial, communication, transport and other services are fundamental to structural economic transformation and also indispensable to deliver healthcare, education and other social services to promote inclusive and sustainable development. The 2019 World Trade Report focuses on trade in services. It reports that although global services trade has expanded significantly in recent years, intra-Africa trade in services is still low. We do have to note that there may well be notable informal trade in services in Africa, for which data is still meagre. But such trade is very important from a development perspective – it matters for livelihoods for many.

The 21st century economy is digital economy and more broadly, a services-intensive economy – read a blog by John Stuart here. Africa’s youth – taking into account the fact that the median age of Africa’s population is 19 years – knows no other economy. These realities are starting to feature prominently in the policies and strategies for industrial development and economic transformation in many Africa countries. The development of, for example, ICT infrastructure, and introducing competition in the ICT-related industries that are critical to achieve universal access to services are essential for Africa’s development and to address the challenges of a growing digital divide – read the blog here. These are issues that should inform the trade in services negotiations in the AfCFTA, which have not enjoyed the same level of attention as the trade in goods negotiations.

It is imperative that non-state actors, such as firms in services sectors, be actively engaged in the preparations for these sector commitment and regulatory framework negotiations. Firms will know what the opportunities are in other African countries; and they will also know what the barriers to accessing those opportunities are. This information is essential to make the request and offer process of negotiations for sector commitments deliver real outcomes. We know that the negotiations will build on what Member states have achieved in the General Agreement on Trade in Services (GATS) – for those that are members of the World Trade Organisation (WTO) – and also, in terms of the principle of the acquis, on what they have achieved in the respective regional economic communities. Member states have also agreed to develop frameworks for regulatory cooperation. Recognising that services are regulatory-intensive, this is a particularly important development. Beatrice Chaytor from the African Union Commission provides an overview and update on the modalities and preparations for the negotiations in the AfCFTA – read the blog here. It is also important to consider the fact that domestic regulatory developments may well have advanced well beyond both the GATS and REC-level commitments. This will be very important, for example, as regards Mode 3 (establishment of commercial presence by foreign firms) in many African countries. A particularly sensitive part of the negotiations may well concern Mode 4 – presence of natural persons to supply services in another member state. Mode 4 is often closely linked to Mode 3; as firms establish a commercial presence in another member state and require experts from the home base to assist with that establishment. Domestic immigration regulations will inform the commitments that are made – often across services sectors, but exclusively so, in the AfCFTA negotiations. Movement of persons across borders remains a very sensitive issue and is linked often to the challenges of unemployment in all African countries, leading in some cases to very tragic xenophobic responses.

The African Union (AU) member states, determined to create single liberalised services market to boost intra-Africa trade, included a Protocol on Trade in Services in the AfCFTA Agreement. The AfCFTA Protocol on Trade in Services, among other things, seeks to create a single liberalised market for trade in services for the continent. The Protocol is the first endeavour to liberalise intra-African trade in services. We discuss how the AfCFTA approach to the regulation of trade in services in a blog by Gerhard Erasmus.

We believe that, if carefully negotiated and implemented, the AfCFTA legal framework for trade in services can significantly enhance continental market access to services contribute to the achievement of economies of scale, reduce business costs, improve the allocation of resources, spur (domestic and foreign) investment and promote regional value chains.

Countries can grow their economies through increased openness in the financial sector. Some African countries such as South Africa (see infographic), Kenya (see infographic) and Rwanda (see infographic) have increased their financial services trade across the continent. But much remains to be done to develop financial and related services markets across the continent. Fundamental to achieving this objective it to be clear about broad sector development priorities. For example, how does the objective of financial inclusion find expression in the trade in services negotiations. We examine where member states could focus to achieve the most benefit from the regulatory aspects of the AfCFTA Agreement in this Blog by Ashly Hope.

An important element of regulation in the cross-border supply of services is the mutual recognition of qualifications, educational standards, licenses or certifications that are granted in another country. This would allow persons permitted or licensed to practice a certain profession in one state to practice that profession in the territories of another state. Such mutual recognition is important to assure the quality or standard of services not only from a technical perspective, as in engineering services, for example, but also for broader consumer and business protection. We discuss the mutual recognition regime created under the AfCFTA in two Blogs: by Gerhard Erasmus (read it here) and Viola Sawere (read it here).

In conclusion, services matter for economic transformation, job creation, competitiveness and development. One need only think about the services content in any good that we buy – a loaf of bread, a book, a T-shirt or a car. Never mind the tech goods such as smart phones that are now commonplace across developed, developing and even least many developed countries. But services are also not a panacea to all Africa’s development challenges.

Technology developments have transformed non-tradeable services into tradeables, and have expanded the scope and dynamics of international trade beyond what was imagined when the General Agreement on Trade in Services was concluded. New modes of distribution services, and e-commerce developments are realities with important implications for traditional business and employment. Data and data governance require urgent attention – waiting opens governance gaps with potentially serious development implications.

Much remains to be done to bring services and trade in services governance into the 21st century for most African countries. Definitions of services (many of which did not exist when the GATS was negotiated), modalities for services negotiations and very importantly the nature and modalities for regulation of services, and for regulatory cooperation and where necessary harmonisation, need fundamental rethinking and review. The Trade in Services Protocol of the AfCFTA and the negotiations to conclude sector commitments and adopt frameworks for regulatory cooperation are an important step in a process that will have to see successive rounds of negotiations. But they are based on the foundation of trade in services governance from a past era. The AfCFTA recognises that successive rounds of negotiation and liberalisation will be necessary to achieve the ambitious objectives of integration and development of the AfCFTA. For the State Parties there remains much to be done to achieve these objectives.