The Tripartite Trade Area Agreement (TPTA) is a tripartite FTA (Free Trade Agreement) between the three biggest economic communities in Africa- The East African Community (EAC), the Common Market for Eastern and Southern Africa (COMESA) and the South African Development Community (SADC). The deal creates a continent-wide market embracing 55 countries with 1.3 billion people and a combined GDP of US$3.4 trillion.
Background of the TPTA
The Abuja Treaty on the Establishment of an African Economic Community (1996) laid a roadmap for the process of economic integration of the African continent. This had to start with economic and technological integration at the Regional Economic Community (REC) level which would later grow into integration at the larger, continental level. The Tripartite Free Trade Agreement Area is the step taken by the RECs to implement the second goal of the Abuja Treaty- continental integration. Once implemented, the TPTA will encompass more than half the continent, making it the biggest step toward the African Continent Free Trade Area (AFCTA). The African Union (AU) further states that a common African Customs Union (ACU) shall be formed post the implementation of the TPTA. The aims of the TPTA are listed out as follows:
(1) Elimination of all tariffs and non-tariff barriers to trade in goods;
(2) Liberalization of trade in services and facilitation of cross-border investment and movement of business persons;
(3) Harmonization of customs procedures and trade facilitation measures;
(4) Enhancement of cooperation in infrastructure development;
(5) Establishing and promotion of cooperation in all trade‐related areas among tripartite member states;
(6) Building of competitiveness at the regional, industry and enterprise level in order to promote beneficial utilization of regional and global markets and investment opportunities, and beneficial participation in globalization.
Economic and Policy challenges to the TPTA: The ‘Smart' Model
With the establishment of any Free-Trade Agreement, there are always a number of economic and policy variables to take into account. In this essay, we shall be examining some of those factors, which pose challenges against the feasibility of the implementation of the TPTA. These economic issues have been highlighted by a study conducted through the Software for Market Analysis and Restriction on Trade (SMART) model.
This section discusses the results provided by the SMART model, to determine the economic feasibility of the possible implementation of the TPTA.
The study shows that the Net Trade Effect total amongst the various countries is distributed as follows:
Picture taken from: African Development Review, Vol. 26, No. 1, 2014, 186–20
The Net Trade Effect is positive and amounts to a total of 1.5 Billion USD. The top 5 countries added together, have a positive balance of 1.32 Billion USD or almost 90%. Post the implementation of an FTA, imports are often substituted from output-efficient nations to member nations of the FTA who incur high production costs, which results in a net loss. This phenomenon is called trade diversion. The study mentions that while around 2 billion USD worth of new trade shall be created with the top 5 countries being the main beneficiary, around 454 million is lost as part of trade diversion, thereby bringing the positive net trade balance to around 1.5 billion USD.
At this point, it is a fair inference to make from the aforementioned study, that the NTE effects haven’t been evenly distributed. With only 5 out of the 26 countries taking up 90% of the positive trade generation, it can be seen that almost as many countries also have an effective loss. This is due to trade creation, which occurs when cheaper imports due to the removal of tariff and non-tariff barriers replace less efficient, high-cost domestically produced goods, resulting in trade that would not have occurred in the absence of the FTA. Hence, we note that the benefits of positive trade creation are, to say the least, unevenly distributed.
Revenue Effect is the net loss faced by the government due to removal of import duties, as a result of which there is a loss of customs revenue- indicating lesser money going to the government Budget. Studying the Revenue Effect amongst member nations, one can find that the losses are shared as follows:
The study finds that the total revenue loss is estimated to be around 1 billion US Dollars. The top 5 countries in this case, share around 70% of the net loss, contributing to around 700 million USD. In this case, it is fair to infer that the distribution of the losses is much more equitably distributed than the positive trade balance. Thus, the loss of Tariff revenues will
have a significant impact on the member nations.
Finally, the removal of Non-Tariff Barriers is a struggle as well. The TFTA countries in specific account for 87 %of the barriers in the African continent. While tariff barriers have declined leading to lowered trade costs, the Non-Tariff Barriers haven’t decreased at the same rate. Technical Barriers to Trade (TBT) and phytosanitary measures are the most common forms of Tariff Barriers, and Uganda, South Africa, Egypt and Kenya account for 86% and 72% of the aforementioned non-tariff barriers.
While presenting an important opportunity to integrate the African market, the TPTA still faces quite a few economic barriers. For starters, it is imperative for countries to look into alternative sources of revenue to compensate for the revenue effect, which would mean fiscal policy changes such as imposition of taxes. Furthermore, the benefits of the TPTA need to be distributed equally. The possibility of industrialisation being limited to the specific TPTA member nations, such as Egypt, South Africa and DRC, is something that we need to be wary of . Finally, countries must look to reduce the amount of Non-Tariff Barriers eventually. For instance, they must work towards the removal of import restrictions and look to facilitate integration to the fullest. Hence, the goal of African economic integration can be made a reality through the means of the TPTA agreement provided that necessary policy changes are implemented and countries proceed with caution.
(Written by Gokul Sundararaghavan and Edited by Ananya Agarwal)