European Perspectives: A new trade bloc in the making?

The Brexit negotiations still make headlines in Britain, but in the corridors of power in Brussels the talk is focused more on other issues. One of them is the proposed partnership between the European Union and the African Union. If this can be achieved, it would lead in the long term to a significant linking of two major markets, the mature European Single Market, and the emerging African Continental Free Trade Area (AfCFTA).

In 2017, at the EU-AU summit in Abidjan, West Africa, German Chancellor Angela Merkel called for a “completely new partnership between Europa and Africa”. The new Commission President, Ursula von der Leyen, repeated a similar message during her visit to the AU Commission in December last year. The intention is to focus on the framework conditions for investment and trade rather than on traditional development policy. Through the years, relations have been predominantly shaped by European preferences, with Africa being a recipient rather than a real partner. Today, the relationship between the EU and Africa is still profoundly asymmetrical, continuing the trade patterns which emerged in the 17th and 18th centuries and which led to the decline of African states and their colonisation.

Until now, the EU-Africa relationship is guided essentially by the provisions of the Cotonou Partnership Agreement, comprising EU member countries, and the African, Caribbean and Pacific (ACP) group of states. The agreement expired in February and is currently being renegotiated. However, the EU has unilaterally changed the ACP funding mechanism during its recent negotiations on its own funding, which makes the ACP much less attractive for African countries. The ACP framework has not resulted in significant economic growth and poverty reduction in Africa, and it is suspected to be a source of corruption in many countries.

Ties between the EU and Sub-Sahara Africa are governed primarily by this and by the European Partnership Agreements (EPA). The Southern African Development Community (SADC) is in the implementation phase. In parallel, there is now an increasingly important AU-EU relationship outside the ACP framework which frames political relations in the Joint Africa-EU Strategy adopted in December 2007. Moreover, ties between the EU and North Africa are governed by the European Neighbourhood Policy with separate association agreements with single states.

Coherence and synergies are clearly missing, and this causes serious problems for investment strategies. Business, seeing its position in China and the Far East eroding, is showing growing attention for a new regulatory architecture in and with Africa. The talk is now of a new “continent-to-continent” partnership on an equitable basis. This can be achieved by focusing on innovation, trade, and institutional improvements. There are several key challenges to resolve.

In Africa, average GDP spending on research is only 0.5%, compared with 2.4% in OECD countries. The partnership should help Africa to develop innovation ecosystems that are cross-border wherever possible to integrate the research-invention-innovation in the market chain. Their added value can be very high and their structure and operating costs very low, so they should become a key element of the future partnership. Financing them on the basis of a “one Africa approach” (including North-African states) is essential to support private economy to create long-term jobs and also lessen pressure from migration on the EU.

Capital needs to be attracted for research projects potentially leading to innovation through new mechanisms, which require public backing. Creation of independent seed and incubator capital fund(s) with a European guarantee and African public and private money is being considered. Such funds could provide up to 80% in seed capital, in the form of a loan repayable at an attractive interest rate. This could also be a secure, attractive way to mobilise funds from the diaspora in Europe. Funding criteria would consider the costs of transition towards a sustainable economy and seek to avoid stranded assets (such as fossil fuels).

The reduction, harmonisation and updating of a variety of strategies, policies, action plans and road-maps for Africa in the European External Action Service and in the Commission will be on the political agenda. There is a need to amend existing agreements and bring coherence and priorities to EU-Africa relations, between Commission Directorate-Generals and between member states. This can lead to greater efficacy of the large European funds available.

The role of aid is being re-considered in order to better respond to African needs. Aid should be seen as complementary only when needed and provided in a way that promotes endogenous economic growth and structural reform. The focus must be on investment and major capacity-building efforts in the public and private sectors. Investment and trade relations will emerge if the right framework conditions are created. Close cooperation, through consultation processes, with the private sector must therefore be encouraged, as the cognitive gap between the public and private sectors is per se an obstacle.

Tax systems can also be a powerful policy instrument for supporting innovation and can be used to reduce investment costs. Macro-economic policy, taxation and monetary policies together can ensure that there is sufficient capital allocation for productive investments in agriculture, manufacturing and services and for their digitalisation, which will lead to employment and welfare creation.

Overall, the AfCFTA is a far more modern approach to revitalising the all-African economy and must represent the cornerstone of the future EU-Africa relationship. It is able to mobilise global value chains of business, and to help digitalisation of the economy and commerce, which the EPA probably will not. It can become the African equivalent of the Rome Treaty, which launched the Common Market in Europe and which ultimately led to the Single Market and the Eurozone. Connecting the two markets can have great benefits for both continents.

The Commission has yet to offer formal negotiations with the AU on building a genuine continent-to-continent free trade agreement, taking the CFTA as a basis and temporarily allowing import tariff for European products if trade barriers and tariff inside Africa will be continuously reduced. Talks will not be limited to pure ‘trade’, but broadened to include the Sustainable Development Goals alongside investments, competition, intellectual property, security, migration and development co-operation. A strategy to improve exports from Africa requires a focus on implementing the Trade Facilitation Agreements (TFAs). An unsolved problem is the different competences of the two Commissions; the AU has less power than the EU, which hinders smooth negotiations.

The EU has been advised not to insist on full reciprocity in any future trading framework. This can be done on a sector by sector evidence-based approach, founded on the reality that African countries are simply not at the same level of economic development as their European counterparts. Therefore, a temporary period of ‘asymmetric liberalisation’ could be foreseen, whereby the EU market would be opened up to all African goods and services, while African countries could continue to protect sensitive sectors. In addition, appropriate protective mechanisms could ensure that nascent African industries and services are not undermined by an influx of European products.

The partnership between the EU and Africa can end a post-colonial donor-recipient mentality. The hope exists, and a road-map should be agreed at the next summit.

Read the next article in this series: European Perspectives: A new European ‘Bauhaus’

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