The African Continental Free Trade Area: An Opportunity for Informal Cross-Border Trade
How can African countries use the African Continental Free Trade Area to overcome the existing challenges to informal cross-border trade and harness the potential of such trade to support income generation, job creation, structural transformation, and food security on the continent?
Informal cross-border trade (ICBT) can play a key role towards the attainment of the continent’s structural transformation and poverty reduction objectives contained in the African Union’s Agenda 2063. The informal economy employs the majority of Africans. A large share of people engaged in the informal economy operate as informal cross-border traders. ICBT contributes about 30-40 percent of total intra-regional trade in the Southern African Development Community (SADC) region and 40 percent in the Common Market for Eastern and Southern Africa (COMESA) region.
In the absence of sufficient formal economic opportunities, ICBT is crucial to addressing vital issues of income generation, job creation, and food security, particularly for Africa’s most vulnerable people, such as women and youth, who usually constitute the majority of informal cross-border traders. In West and Central Africa, women represent nearly 60 percent of informal traders. In Southern Africa, they represent about 70 percent of them. ICBT, which has proven to be more responsive to food crises and shocks when compared to formal trade, is largely practiced by the officially unemployed and micro, small, and medium-sized enterprises (MSMEs), and is therefore also important for strategies of inclusion.
What may come as a surprise is that ICBT also offers significant opportunities in terms of economic diversification, value addition, and the development of competitive cross-border value chains. This is because the scope of ICBT is wide and extends beyond basic agricultural products, such as maize and raw milk, to also include manufactured goods (e.g. processed foods, clothes, electronics and car spares) and services (e.g. bicycle and car repairs, hairdressing, and artisanal work).
The challenging environment of ICBT
Informal cross-border traders face a number of challenges that prevent the full developmental potential of ICBT from being realised. These include a lack of trade facilitation; inadequate border infrastructure; limited access to finance; a lack of market information; corruption and insecurity; and limited knowledge, education and business management skills.
Although these challenges are common to many African traders, they are particularly acute in the informal setting. For example, the majority of informal cross-border traders are partially literate or illiterate, which makes it difficult for them to read, understand, and complete the numerous mandatory forms and procedures at borders. Customs officials at some border posts take advantage of this by asking informal cross-border traders to pay duties on commodities that should not attract any levies, and in the event of failure to pay, bribes are solicited to allow the uninformed traders to cross with their goods. Informal traders are also frequently treated as criminals and illegals, which makes them particularly vulnerable to abuse, corruption, and harassment at the hands of state authorities such as border officials, immigration, and the police.
Shifting to a more friendly environment
Although ICBT has been traditionally sidelined in policy discussions on trade and development, more recently, there have been a number of encouraging initiatives on the continent targeted at facilitating improvements in the conditions in which ICBT is conducted and supporting the transition to formalisation.
The most ambitious efforts are the simplified trade regimes (STRs) introduced by the Common Market of Eastern and Southern Africa (COMESA) and the East African Community (EAC), which aim at facilitating small-scale cross-border trade in products originating from within the REC. Informal cross-border traders are provided simplified certificates of origin by customs officials; a common list of goods that qualify for the STR; simplified customs documents; and assistance in completing customs documents, clearing procedures, and answering trade-related queries from the trade information desk officers at the borders. This has helped to address some of the challenges faced by informal cross-border traders, bring ICBT into the formal trading system, and extend the benefits of freer trade to informal traders. Some informal cross-border traders interviewed in COMESA are confident that their businesses will succeed and formalise just like former colleagues “who were once ‘small’ like them but had graduated into ‘big people’ (formalised traders) because they had successfully taken advantage of the STR.”
Officials from Burundi, the Democratic Republic of the Congo, Rwanda, Tanzania and Uganda have committed to work together in addressing challenges hindering cross-border trade in the region. This cooperation is to include the construction of markets at the borders to support informal cross-border traders and other complementary facilities such as early childhood development centres to support women traders.
The dearth of reliable data on key indicators of ICBT has accentuated the lack of recognition of its important economic role in national and regional policies and frameworks. A handful of African countries – such as Kenya, Rwanda, and Uganda – have, however, now started to collect data on informal trade. Data on ICBT is also consistently collected by the East African Grain Council (EAGC), Famine Early Warning Systems Network (FEWS NET), Alliance for Commodity Trade in East and Southern Africa (ACTESA), and Brahima Cisse (CILSS). Further, the COMESA STR has proved to be an important tool for capturing ICBT’s contribution to total trade through the STR form, whereby information is captured in the Automated System for Customs Data (ASYCUDA).
These efforts are definitely a step in the right direction but are yet to influence a real change in the attitudes of policymakers across the wider continent. The landmark African Continental Free Trade Area (AfCFTA) agreement, which was signed at the African Union (AU) Special Summit held in Kigali on 21 March 2018, offers an opening to change this and ensure that the full potential of ICBT is harnessed under a single comprehensive framework.
The AfCFTA: harnessing the potential of ICBT
Although ICBT is not explicitly reflected in the AfCFTA agreement and the separate AU Protocol on Free Movement of People, indirectly, the AfCFTA has the potential to generate significant benefits for informal cross-border traders. In addition, there is still time to incorporate ICBT issues into the AfCFTA’s second phase of negotiations around investment, intellectual property rights, and competition policy, as well as in the AfCFTA implementation stage.
The joint report of the United Nations Economic Commission for Africa (ECA), the United Nations Office of the High Commissioner for Human Rights (OHCHR) and the Friedrich Ebert Stiftung’s (FES) Geneva Office entitled “The Continental Free Trade Area in Africa – A Human Rights Perspective” provides some helpful pointers on how the AfCFTA can be used to drive the development of a continental strategy towards addressing ICBT.
Supporting the formalisation of ICBT
By reducing tariffs, the AfCFTA will make it more affordable for informal traders to operate through formal channels, which offer more protection. This can be further enhanced by introducing a Continental Simplified Trade Regime (CSTR), since cross-border traders operating under such a regime would no longer be trading informally. In fact, officials within the COMESA STR refer to those using the scheme as “small-scale” traders rather than informal traders, which also helps to eradicate the perception of illegality.
In terms of design and implementation, the CSTR would be best handled at the level of the regional economic communities (RECs) and bilaterally between proximate member states of a given REC, since economic and market conditions are not uniform across the continent. The AfCFTA would provide an umbrella and high threshold under which respective RECs and member states could negotiate specific goods and services to be exchanged under the common list as dictated by local conditions. Such lists should aim to be more extensive (including manufactured goods) than the common lists of the COMESA and EAC STRs, and apply reasonably high thresholds. Investing in outreach and knowledge dissemination on both the contents of the AfCFTA agreement and the CSTR will also be key.
National strategies for formalisation, including support to MSMEs, are needed to complement the opportunities offered by the AfCFTA. In particular, African countries should design incentives to simplify tax administration and business registration; limit licensing and certificates to activities where it is justified (e.g. to protect health and safety); reduce registration fees and ensure they are not regressive; and guarantee any statutory requirements are fully justified.
Reducing the costs of ICBT
The AfCFTA will help to address some of the key challenges to ICBT, since it includes provisions on non-tariff barriers (NTBs), trade facilitation, transit, and customs cooperation. In particular, the AfCFTA agreement commits African countries to establish an NTB mechanism to monitor, report, and resolve NTBs under the AfCFTA, building upon the good work already achieved by Africa’s RECs. The NTB mechanism should be designed in such a way that ensures accessibility to informal cross-border traders. Simple reporting processes and translation services to support reporting in various local languages would help. To increase uptake, training could also be provided to small-scale informal traders to enable them to better identify the NTBs they face, and incentives such as rewards could be offered to those who report on verifiable NTBs they experience or observe.
The AfCFTA has also reignited discussions on its sister initiative, the Boosting Intra-African Trade (BIAT) Action Plan, which provides the leading framework for addressing challenges to intra-African trade that are particularly acute for informal cross-border traders, including regarding trade-related infrastructure, trade finance, and trade information. The ECA has recommended that the institutional structure for the implementation and monitoring of the BIAT Action Plan be folded into the AfCFTA. The private sector can play a key role in contributing to ICBT initiatives under the AfCFTA and BIAT Action Plan. In fact, the African Export Import Bank (AFREXIMBANK) has expressed significant interest in supporting the extension of trade finance and payment products to informal cross-border traders, and many e-commerce players identify the informal sector as a crucial market.
ICBT in the second phase of the AfCFTA negotiations
Informal cross-border trade can still be reflected in the second phase of the AfCFTA negotiations on investment, intellectual property rights, and competition policy. National-level consultations on second phase issues should include informal cross-border traders or representatives of the sector, including women. This will help to inform the development of provisions that promote the development of pro-ICBT policies and programmes. This could include, for example, investment provisions that provide for the allocation of quotas for targeted investments in sectors and areas that make up the informal cross-border traders’ (physical) operating environment.
Free movement of informal cross-border traders
To support the Protocol on Free Movement of People, African countries should consider creating a special travel document for informal cross-border traders to make it easier for them to legally and affordably cross borders for trade purposes. Currently, a substantial percentage of informal cross-border traders are unable to acquire passports on account of cost. The high frequency with which small-scale traders cross international borders exacerbates the often already high cost of passports, due to the need to renew their passport several times a year. Informal cross-border traders instead tend to use temporary entry provisions (such as day passes) to travel for business in neighbouring countries.
The special travel document for cross-border traders could build on the idea behind the provision of day passes to residents of border communities in respective countries and RECs across Africa. Given that cross-border movers who use the day passes are only permitted to travel or cover a specific distance inland in a neighbouring country and cannot go beyond, the special travel document could extend such a distance to enable traders to reach a location where they wish to distribute goods and provide services. Alternatively, an approach similar to the one adopted by the EAC, where citizens of EAC member states can use the national registration/identity documents of their respective country to travel to other member states of the EAC, could be considered.
Track progress on ICBT through policy frameworks and data collection
The implementation phase of the AfCFTA can be supported by the development of a continental policy and institutional framework to facilitate the monitoring of progress in alleviating the constraints faced by informal cross-border traders, particularly women. Such a policy would need to be designed in a way that creates opportunities for informal cross-border traders not only to be recognised (without the tag of illegality), but also to claim their space in the AfCFTA and AU member states. Only then could benchmarks be established to measure progress on ICBT and informal cross-border traders’ rights as economic actors. The supporting institutional framework should create an environment in which informal cross-border traders, and in particular women, could form recognisable associations devoted to identifying and seeking assistance to address the challenges faced by members.
Monitoring progress in addressing ICBT issues will require significant improvements in data collection, since with only a handful of exceptions, official trade statistics in Africa only capture formal trade. This data could provide a basis for targeting financial and non-financial assistance to informal cross-border traders such as credit, business advisory and extension services, and market information. In fact, the ECA and the AFREXIMBANK are about to embark on a pilot project to collect data on ICBT along the Abidjan-Lagos corridor, which is expected to provide a useful methodological framework for scale up at the continental level.
Informal cross-border trade has an important role to play in Africa’s development, through contributing to income generation, job creation, structural transformation, and food security. The African Continental Free Trade Area offers a crucial opportunity for harnessing the development potential of ICBT. The AfCFTA Agreement includes a number of provisions that are expected to reduce the costs and enhance the efficiency of ICBT. It is important that these provisions are supported by complementary measures to facilitate ICBT, including a Continental Simplified Trade Regime; improvements in data collection on ICBT; targeted programmes on trade finance and cross-border infrastructure; and efforts to reduce the costs of formalisation for MSMEs. The second phase of the negotiations should also be used as platform to more effectively address the various issues and challenges related to informal cross-border trade.
Authors: Lily Sommer, Trade Policy Fellow, African Trade Policy Centre, United Nations Economic Commission for Africa. Chris C. Nshimbi, Deputy Director & Research Fellow, Centre for the Study of Governance Innovation (GovInn), University of Pretoria.
Photo credit: Jan Hoffmann
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