What is free trade and the African Continental Free Trade Agreement?
Trade Policy Brief | Alternative Information & Development Centre | Jonathan Cannard, 2021
Trade agreements since the 1990s have locked states into the paradigm of “free trade,” which relies on the lowering of all barriers to trade, most particularly tariffs. The process of removing or reducing trade barriers is referred to as trade liberalisation. Localisation, import-substitution, and protection of domestic industries are almost entirely banned, while minimum standards for foreign investment protection and intellectual property rights are mandated, preventing states from deploying the industrial policies that would allow them to produce new local industries.
This trade paradigm relies on the assumption that trade liberalisation will benefit all countries, allowing them to exploit their national ‘comparative advantages.’ In most of the African continent, this means increased deindustrialisation and deepened dependence upon raw materials exports. Democratic decisions and state sovereignty over which industries should be prioritised or developed are subsumed under free trade’s insistence on allowing markets to determine industrial strategy. Despite its name, “free” trade, therefore, limits the policy space available to states, locking them into market-based trade and industrial policies that necessitate the exploitation of comparative advantages.
The ‘free trade’ paradigm, which limits the policy options available to states, has been increasingly institutionalised since the early 1990s. The formation of the World Trade Organisation (WTO) in 1995 marked a widespread adoption of free trade, and in 2021 almost all countries in the world are WTO members. Most countries have signed numerous further trade agreements in the years since 1995. These have included bilateral agreements between two states and multilateral agreements between blocs of states. Although the agreements vary, they have the same goal of eliminating barriers to trade and removing state sovereignty over industrial and trade policy, ‘kicking away the ladder’ that developed countries had once climbed.
The African Continental Free Trade Agreement (AfCFTA) is the latest free trade agreement to affect the African continent. It seeks to further reduce barriers to trade within the continent, particularly focusing on tariffs. The agreement has the goal of significantly increasing intra-African trade, which tends to be in higher value-added goods and thereby produce regional value chains. If accomplished, the formation of new value chains could ease the continent’s reliance on foreign industries and create employment. But the AfCFTA locks African states further into the “free trade” paradigm, removing the industrial and trade tools that would allow them to intentionally produce industries and value chains. The agreement will therefore only increase the continent’s reliance on raw materials exports. Without the capacity for localisation and industrial policies aimed at protecting potentially important sectors, such as import substitution and government subsidies for local industries, policies that are largely banned, Africa, will be unable to develop the envisioned value chains. This will result in foreign entrenched manufacturers benefitting the most from the agreement, as they can take advantage of continental integration and expanded markets. The AfCFTA tightens the grip of the restrictive trade rules, further removing state industrialisation tools and locking Africa deeper into a reliance on foreign direct investment and portfolio investment as well as a dependence on revenue from raw materials exports.
The Current State of Trade:
While states around the world have signed increasingly more trade agreements, the provisions inherent in WTO accession have also transformed, tightening the grip of this restrictive trade paradigm. The wide variety of trade agreements signed by African states since the early 1990s has created what is often referred to as a “spaghetti bowl” of overlapping regulatory regimes and institutions*. Bound by this immense, complicated web of mutually reinforcing trade agreements, African states are increasingly locked into market-led trade policies, their sovereign policy space for independent macroeconomic, trade and industrial strategy continuously eroded.
Globally, the slow continuation of the “free trade” paradigm allowed capital and industry drastically more mobility than they were afforded before the WTO and later trade agreements. Manufacturing can now take place anywhere in the world, and investment has accordingly been redistributed to countries in which labour, social, and environmental costs are the least expensive. States have responded by competing amongst each other, with lower labour costs, financial deregulation, lower corporate tax rates, and weakened environmental protection becoming competitive factors in attracting foreign investment and manufacturing. As states compete to attract investment by deregulating environmental protection and destroying labour standards, their countries’ working classes are pitted against each other in a ‘race to the bottom’. The race to the bottom has shifted manufacturing to lower-income countries, severely weakened the collective bargaining power of organised labour, and lowered the material circumstances of working classes worldwide. Not only has the race to the bottom proven disastrous for the working class, the environment, poverty reduction efforts, and development, it also routinely fails to even attract investment into the real economy. In recent decades South Africa has adopted such policies to attract capital inflows (in the form of FDI and portfolio investment), but manufacturing has nonetheless continued to leave the country, reflected in deindustrialisation and a steadily rising unemployment rate.
Forced to compete in the race to the bottom, states have lost many of their last remaining development tools. Free trade relies on an assumption that national development is best achieved through states exploiting their ‘comparative advantages,’ allowing market forces to determine which industries can drive economic growth**. For the African continent, this means a deepened reliance on extractive industries and raw materials exports. States are thereby forced to develop only by allowing the market to lead, preventing the planning and localisation that would allow alternative job-led industrialisation paths to be chosen.
Tariff barriers, demonised through trade agreements, have long been a core component of industrialisation and development programmes. Import tariffs allow states to protect their smaller, vulnerable industries from international competition, granting them the space to generate employment and gain stability without exposure to the vagaries of the global market. By severely limiting states’ ability to impose tariffs, trade agreements prevent states from choosing which industries to prioritise and develop, instead of locking them into the exploitation of their comparative advantages. Not only do tariffs allow states to protect their industries, but they also provide significant portions of government revenue. Removal of this government revenue through increasing tariff liberalisation further deepens the austerity budgets so common across the continent.
Most free trade agreements, including the WTO’s Agreement on Subsidies and Countervailing Measures (SCM) place limitations on states’ ability to deploy subsidies as part of development and industrialisation programmes. Subsidies lower the cost of production below market-determined rates, allowing industries stability, generating employment, and easing processes of technology transfer***. The SCM, followed by most other free trade agreements, bans subsidies that are contingent upon either export performance or the use of domestic goods or services****. In essence, this means that state subsidies cannot be targeted towards local industries, they must be as accessible for foreign transnational corporations as they are for local manufacturers.
The intellectual property restrictions imposed through free trade agreements prevent the rapid and affordable technology transfer that would be necessary for a Just Transition towards a wage-led, low-carbon development path. Even if a local, African manufacturing base for renewable energy technology is produced, these manufacturers will require the technical designs for solar panels, wind turbines, and other technologies. Currently, these designs are protected under the WTO’s Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), which sets a global baseline for intellectual property protections. Later agreements have increased intellectual property rights timelines, making technology transfer an even lengthier process. This severely restricts access to the technologies that must be rolled out on large scale in order to avert climate catastrophe, while favouring the profits of the handful of corporate entities that monopolise renewable energy. Mandatory technology transfer and reverse engineering would be required in spreading renewable energy technologies globally, but such measures, although required for a Just Transition, would run afoul of numerous trade agreements, potentially leading to retaliatory trade measures.
Suggestions for Future Trade Policy:
The wide variety of free trade agreements signed by African states are incompatible with the imperatives of tackling climate change, industrialising the African continent, and creating new sources of sustainable employment. African states must therefore break from the global trade regime, formulating new trade policies that reject “free trade,” taking back the policy space for import substitution, localisation, and intentional value chain formation.
Crucially, the African Continental Free Trade Area (AfCFTA), although already in force, still has space for negotiation and contestation. ‘Phase 1’ negotiations, focused on tariff reductions and trade in goods, have been completed. But ‘Phase 2’ negotiations are still underway, covering intellectual property, investment protection, competition policy, and ‘e-commerce.’ These issues are crucial in determining the trade futures of African countries, and the ongoing negotiations provide a platform for states, civil society, activist networks, and organised labour to exert pressure and achieve the most favourable outcomes possible. The intellectual property and investment negotiations are of particular importance if the continent is to gain access to crucial technologies and break from its dependence on export-led growth and speculative foreign investment.
Intellectual property, as regulated through the trade regime, must be challenged. The Covid-19 pandemic has popularly highlighted the inequities presented by intellectual property, particularly as it relates to access to medicines and medical equipment. Numerous states and civil society bodies have called for a waiver of TRIPS regulations, which would allow for the sharing of technologies, compulsory licensing, and the production of inexpensive generics. TRIPS Article 31(b) provides the “national emergency” exception. The Article states that intellectual property may be used by states without authorisation of the rights holder “in the case of a national emergency or other circumstances of extreme urgency”. Article 31(b) has been invoked in fighting health epidemics, including South Africa’s HIV/AIDS crisis in the early 2000s. However, given the clear scientific consensus on climate change and its disastrous effects on human societies, the climate crisis should certainly qualify as an ‘emergency or other circumstance of extreme urgency’. This Article should be invoked in order to drastically decrease the rollout time of the most advanced renewable energy technology, without waiting decades for patents to expire. A TRIPS waiver for renewable energy technology would allow for quick technology transfer, and lower the cost of producing these technologies, both necessary pre-conditions for the massive rollout of renewable energy that will both mitigate the climate crisis and tackle unemployment. However, this waiver must be only a starting point. To achieve a true Just Transition, the entire “free trade” paradigm must be rejected, including its enabling of the hoarding of intellectual property.
Despite sustained and well-funded opposition to the TAC’s demands, the organisation managed to create a moral consensus around the issue. Pharmaceutical companies and Western states argued that strong intellectual property rights promote ‘innovation’ and drive economic growth, and thereby work within the logic of capitalist accumulation. The TAC managed to frame their argument as one of basic human rights over capitalist logic, thereby rendering the arguments of their opponents irrelevant and inconsequential. The TAC made it clear that although the provision of generic ARVs may lower profit margins, there was a moral imperative to do so. Social movements fighting for a Just Transition away from fossil fuels, including a rejection of TRIPS protections, could make a similar moral argument that intellectual property rights preventing access to renewable energy protect private profit at the expense of development and climate change mitigation.
Social movements and trade unions have crucial roles to play in the fight to drop intellectual property protections for renewable energy. In the South African HIV/AIDS crisis of the 1990s and early 2000s, the Treatment Action Campaign (TAC) organised around the principle of universal access to antiretroviral treatment (ARVs). TAC lobbied for the South African state to use the “national emergency exception” in the TRIPS Agreement, so as to issue compulsory licences for domestic drug manufacturers to produce ARVs without authorisation from the licence holders. Although controversial and contested, the TACs opposition to the IPR regime through TRIPS exceptions allowed them to directly challenge the injustice of transnational pharmaceutical companies profiting from the HIV/AIDS crisis. A similar situation exists today, in which privately-held renewable energy technology patents allow for massive capital accumulation but prevent the radical cutting of greenhouse gases.
States must avoid signing restrictive free trade agreements going forward, and must also either exit their current agreements or allow them to expire. There is a crucial role for social movements, trade union formations, and broader civil society to play in monitoring their state’s trade relations and pressuring policymakers to break from the free trade paradigm. South Africa took an early lead in this regard, allowing many of its bilateral investment treaties (BITs) to expire. The post-apartheid government signed BITs with countries across the globe in the 1990s, but in the early 2000s private investors used these treaties to challenge perceived threats to their investments, including Black Economic Empowerment laws. This highlighted the incompatibility of free trade and investment rules with even the most basic of redistributive policies, and the state refused to resign many of its BITs after their expiry. The South African state’s ability to reject aspects of the global trade regime highlights that states across the continent still have the capacity to formulate their own trade policies, if the political will to do so exists. Social movements and organised labour can exert pressure on their states to exit trade agreements, renegotiate or reject the AfCFTA, and reject ongoing attempts to formulate new “free trade” institutions.
Glossary of Terms:
Deindustrialisation – A decline in industrial capacity and output, particularly in manufacturing.
Financial Deregulation – A removal or reduction of state regulations or controls on the financial economy, allowing finance (“money”) more mobility and sovereignty.
Government Subsidies – State payments to assist either producers or consumers, which lower the cost of production of certain goods, or the cost of consuming certain goods, respectively.
Import Substitution Industrialisation – Industrialisation through the replacement of imports with locally manufactured goods.
Intellectual Property Rights – Private ownership of works of intellect and information, protected through patents, copyright, trade secrets, and industrial design rights, enclosing the commons of thought.
Intra-African Trade – Trade within the African continent, between sovereign African countries.
Localisation – Intentional production of industrial capacity or other economic activity domestically or regionally, replacing imports.
Import Tariff – A tax on imported goods or services, generally as a percentage of the value of the import. Allows protection of domestic industries and provides government revenue.
* Olabisi Akinkugbe, “A Critical Appraisal of the African Continental Free Trade Area Agreement,” in International Economic Law From a (South) African Perspective, ed. Kholofelo Kugler and Franziskca Sucker, (South Africa: JUTA Law, 2021), 291.
** Alice Amsden and Takashi Hikino, “Staying Behind, Stumbling Back, Sneaking Up, Soaring Ahead: Late Industrialization in Historical Perspective”, in Convergence of Productivity: Cross-National Studies and Historical Evidence, ed. William Baumol, Richard Nelson and Edward Wolff (Oxford: Oxford University Press, 1994), 291.
*** Alice Amsden and Takashi Hikino, “Staying Behind, Stumbling Back, Sneaking Up, Soaring Ahead: Late Industrialization in Historical Perspective”, in Convergence of Productivity: Cross-National Studies and Historical Evidence, ed. William Baumol, Richard Nelson and Edward Wolff (Oxford: Oxford University Press, 1994), 291.
**** Rhulani Shaun Matsimbi, “An Analysis of the Countervailing Measures Used to Address the Anti-Competitive Effects of Government Subsidies in the African Continental Free Trade Area”, Master’s Thesis, Rhodes University, 2020, 6.
African Continental Free Trade Agreement. Annex 2: Rules of Origin.
Ajibo, Collins. “African Continental Free Trade Area Agreement: The Euphoria, Pitfalls and Prospects.” Journal of World Trade 53(5) (2019): 871–894.
Amsden, Alice and Takashi Hikino, “Staying Behind, Stumbling Back, Sneaking Up, Soaring Ahead: Late Industrialization in Historical Perspective.” In Convergence of Productivity: Cross-National Studies and Historical Evidence, edited by William Baumol, Richard Nelson and Edward Wolff, 285-315. Oxford: Oxford University Press, 1994.
Bellini, Emiliano. “ARTsolar: South Africa Must Preserve its Solar Module Industry.” PV Magazine. 27 May 2019.
Bigdeli, Sadeq Z. “Clash of Rationalities: Revisiting the Trade and Environment Debate in Light of WTO Disputes Over Green Industrial Policy.” Trade, Law and Development 6 (2014): 177–209.
Chang, Ha-Joon. Kicking Away the Ladder: Development Strategy in Historical Perspective. London: Anthem Press, 2003.
Chang, Ha-Joon. “Why Developing Countries Need Tariffs? How WTO NAMA Negotiations Could Deny Developing Countries’ Right to a Future.” The South Centre. 2005.
Davies, Rob. Personal Email Correspondence. 23 September 2019.
Fiezzoni, Silvia Karina. “The Challenge of UNASUR Member Countries to Replace ICSID Arbitration.” Beijing Law Review 2 (2011): 134–144.
Ghatii, James Thuo. “Designing the Continental Free Trade Area: An African Human Rights Perspective.” OHCHR, UNECA, Friedrich-Ebert Stiftung. Scoping Study. 2016.
Ghori, Umair Hafeez. “Reverse Permissibility in the Renewable Energy Sector: Going Beyond the US-India Solar Cells Dispute.” Asian Journal of International Law 8(2) (2018): 322–349.
Government Gazette No. 42337. Department of Trade and Industry. International Trade Administration Commission. Customs Tariff Applications. List 02/2019. 29 March 2019. 779.
Halbert, Deborah. “Moralized Discourses: South Africa’s Intellectual Property Fight for Access to AIDS Drugs.” Seattle Journal for Social Justice 1(2) (2002): 257–295.
Hildreth, Virginia R. “Renewable Energy Subsidies and the GATT.” Chicago Journal of International Law 14(2) (2014): 702–730.
International Centre for Trade and Sustainable Development. “Madagascar’s AGOA Benefits Reinstated, Swaziland Loses Status.” July 2014.
Kang, Moonsung. “Formulas for Industrial Tariff Reduction and Policy Implications.” Asia-Pacific Research and Training Network on Trade. Policy Brief 5, 2005.
Kelsey, Jane. Serving Whose Interests? The Political Economy of Trade in Services Agreements. New York: Routledge, 2008.
Lee, Bernice, Iliev, Ilian and Preston, Felix. “Who Owns Our Low Carbon Future? Intellectual Property and Energy Technologies.” Chatham House. 2009.
Lee, Jaemin. “SCM Agreement Revisited: Climate Change, Renewable Energy, and the SCM Agreement.” World Trade Review 15(4) (2016): 613–644.
Mastromatteo, Andrea. “WTO and SOEs: Overview of Article XVII and Related Provisions of the GATT 1994.” European University Institute. Robert Schuman Centre for Advanced Studies, Working Papers. 2017.
Matsimbi, Rhulani Shaun. “An Analysis of the Countervailing Measures Used to Address the Anti-Competitive Effects of Government Subsidies in the African Continental Free Trade Area.” Master’s Thesis. Rhodes University. 2020.
Moon, Suerie. “Does TRIPS Article 66.2 Encourage Technology Transfer to LDCs? An Analysis of Country Submissions to the TRIPS Council (1999–2007).” UNCTAD- ICTSD Project on IPRs and Sustainable Development. Policy Brief 2. 2008.
Panel Report. European Union and its Member States – Certain Measures Relating to the Energy Sector. WT/DS476/R (10 August 2018).
Peterson, Luke Eric. “South Africa’s Bilateral Investment Treaties: Implications for Development and Human Rights.” Dialogue on Globalization. Friedrich Ebert Stiftung, Occasional Paper 26. 2006.
Obeng-Odoom, Franklin. “The African Continental Free Trade Area.” The American Journal of Economics and Sociology 79 (2020): 167–197.
Request for Consultations by the European Union. China – Certain Measures on the Transfer of Technology. WT/DS549/1 (1 June 2018).
Signé, Landry and Payce Madden. “Considerations for Rules of Origin Under the African Continental Free Trade Area.” Journal of African Trade. November 2020.
Tralac. South Africa Merchandise Trade Update: 2018.
Tsowou, Komi and Junior Davis. “Reaping the AfCFTA Potential Through Well-Functioning Rules of Origin.” Journal of African Trade. April 2021.
Trevor Manuel. Mail & Guardian. 21 January 2005.
Wind, Izaak. “HS Codes and the Renewable Energy Sector.” International Centre for Trade and Sustainable Development. 2008.
Zongwe, Dunia and Paul Masumbe. “The African Customs Union, Infant Industry Protection, and Self Centred Development,” Speculum Juris 92(34) (2020): 93–114.