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African trade zone strengthens bargaining power

The African continent’s zone will have estimated GDP of USD 624 billion and cover more than 527 million people 

Three African trading blocs have created a free trade zone of 26 countries – stretching from Egypt to South Africa – with a GDP estimated at USD 624bn.

It is hoped the deal will ease access to markets within the continent for global investors and end trading problems arising from the countries’ membership of multiple trading groups.

The deal also aims to strengthen the continent’s bargaining power when negotiating international deals.

Analysts say the agreement, signed in October 2008, will help intra-regional trade and boost growth. The agreement is also expected to stimulate joint infrastructure and energy projects in the zone. 

The three blocs that struck the deal were the Southern African Development Community (SADC), the East African Community (EAC) and the Common Market for Eastern and Southern Africa (Comesa). Six heads of state from the 26 countries attended a meeting in the Ugandan capital, Kampala, to sign the agreement. They plan to set a timeframe for integration within a year.

“The greatest enemy of Africa, the greatest source of weakness, has been disunity and a low level of political and economic integration,��? says Ugandan President Yoweri Museveni. “Bigger markets are a strategic instrument of liberating people from poverty.��?

Many of the leaders and representatives consider the new pact a way of giving Africa a greater voice on the world stage. President Museveni says that it is a step in the right direction for a continent that suffers unfairly within global trade.

South African President Kgalema Motlanthe says: “By coming together, the member states will have a strong voice in advancing our interests on the international scene.

“While Africa and other developing countries have marginal influence over the decisions that have brought the international finance systems to the brink of collapse, unjustifiably, African countries will bear the brunt.

“Developing countries must be included in the governance of all international financing institutions to mitigate adverse effects on them.��? 

Director-general of South Africa’s department of foreign affairs, Ayanda Ntsaluba, says: “When we have a pan-regional free trade area we will have a legitimate base to negotiate as a bloc. Then some of the internal contradictions that arise as we negotiate as separate regions begin to be taken away.��? 

Debbie Goldthorpe, chief operating officer at Africa Matters, which helps companies conduct business in Africa, believes the free trade zone will open up more opportunities for investors in the continent. Although “some way down the track��?, the bloc will enhance investors’ experience of trading conditions, such as in cross-border delays and different import and export duties.

The three blocs merging together are already well-established in their own right: they cover varying swathes of land and numbers of people.

The SADC covers a population of 248 million people and a zone where cumulative GDP is USD 379 billion (2006 latest figures).

The SADC’s members include South Africa, Tanzania, Zambia and Zimbabwe.

Comesa covers 398 million people. The area has a combined GDP of USD 286.7 billion (2006 latest figures). Among its members are Uganda and Sudan.

EAC is the smallest of the group in terms of GDP – USD 46.6 billion in 2006.

In all, the pan-Africa trade zone covers Angola, Botswana, Burundi, the Comoros, the Democratic Republic of Congo, Djibouti, Egypt, Eritrea, Ethiopia, Kenya, Lesotho, Libya, Madagascar, Malawi, Mauritius, Mozambique, Namibia, Rwanda, the Seychelles, Sudan, Swaziland, South Africa, Tanzania, Uganda, Zambia and Zimbabwe.

Declared targets of the new zone are to help streamline access to African markets; boost growth and intra-regional trade; establish joint infrastructure and energy projects; and establish a single customs union. It will encompass more than 527 million people. 

Globalisation of international supply chains, resulting in an immense increase in the volumes of cross-border flows of goods, also provide an opportunity for the zone to present savings in indirect taxes.

But of equally prominent interest to the zone is investment from China. Already, individual economic zone arrangements are operating between individual African states and China, such as the Chambishi Multifacility Economic Zone, Zambia. Based on its copper mine, it has obtained a promised USD 650 million investment from China over the next five years. Use of that zone is perceived to be an opportunity almost exclusively reserved for Chinese companies.

Several African governments, anxious to attract Chinese investment, are entering into similar arrangements. China is negotiating to open five ‘economic cooperation zones’ in various parts of Africa. All are likely to provide tax exemption and favourable rights of access to local minerals, in return for the creation of thousands of jobs.

Trade zone structures

Specialised areas offering tax incentives to foreign companies meeting certain conditions are common in developing markets.

At least 3,000 free trade zones – duty-free areas, providing warehousing, storage and logistics facilities, aimed at the trade, trans-shipment and re-exporting markets – are scattered around almost all parts of the globe.

The recognised market leader is the Jebel Ali Free Zone, Dubai, United Arab Emirates, which has grown from 19 companies in 1985 to more than 6,000 companies from over 110 countries. It is the flagship of the Dubai Government-owned Economic Zones World (EZW), which has been developed to harness Dubai’s expertise in this market and to export that expertise to sites across the globe.

EZW has recently developed agreements with Misurata Economic Zone in Libya and Djibouti Free Zone at the gateway to the Red Sea – moves intended to be the start of increased involvement across most of the emerging markets.

Other markets developing major free trade zones include Morocco, Turkey, Egypt and Jordan.

An extension of the traditional free trade zone is the export processing zone, which accommodates manufacturing and related facilities for the export market. Such zones are large and usually comprise several industrial estates. A variation is a hybrid that has a second area open to various businesses, alongside the export designated area.

Some zones are single factory export processing zones, where individual investors reach agreements with governments for an exclusive manufacturing arrangement, in return for tax and other concessions.

Special economic zones, sometimes called freeports, are widely used in China and are more ambitious in scope and larger than traditional free zones. Many accommodate any type of industrial or service sector and allow senior staff in investing businesses to reside on-site. Such zones may cover areas that include free trade zones and export processing zones within them.

Enterprise zones provide tax incentives and investment grants to businesses locating in deprived areas. They are mostly located in developed nations.

UHY’s African continent firms are in Angola, Egypt, Kenya, Morocco, Nigeria and South Africa.