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ESG and the African Continental Free Trade Agreement

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The AfCFTA emphasises the importance of creating entrepreneurial opportunities for women and youth, especially in agriculture and food systems. Image credit: Leon Louw for WhyAfrica

ESG and the African Continental Free Trade Agreement 

The forward momentum of Environmental, Social and Governance (ESG) principles, which permeate every aspect of global economic activity, is also evident in the first strides the African Continental Free Trade Agreement (AfCFTA) has taken. 

By Yael Shafrir, Attorney |Competition, Trade & Investment practice at Webber Wentzel

The AfCFTA’ s adoption of ESG principles in a way that is relevant to Africa will enable it to attract capital and achieve its ultimate objective of promoting trade and the free movement of goods, services and people across the continent.

AfCFTA could be a game changer for the continent. There is an entire ecosystem of national, regional, and international governmental and economic organisations rallying behind its success as it gains momentum.

However, for the AfCFTA to be a real game changer, it needs to not only achieve its trade and investment objectives but also create a truly transformative impact in governance, climate change and in the social and community sphere.

Recent developments in the AfCFTA roll-out (ESG and the African Continental Free Trade Agreement)

There have been several developments in putting the AfCFTA into action. The Southern African Customs Union (SACU) has formally presented its tariff offer, under the Agreement on Trade in Goods, to the AfCFTA Secretariat for review to ensure it accords with the modalities.

Once it is approved and accepted, it will be incorporated into South African law. Significant progress has also been made on the Agreement on Trade in Services; the Investment Protocol and Dispute Resolution mechanism; the Competition Protocol; and the Intellectual Property and E-commerce Protocols.

Most significantly, the Rules of Origin, which will determine whether a product is “made in Africa”, have largely been agreed. Only those rules relating to automotive and textiles require finalisation.

There is visible progress on payment systems (under the Pan-African Payment and Settlement System (PAPS) launched by Afreximbank) and transport and logistics, through the Programme for Infrastructure Development in Africa (PIDA).

Just as Africa’s mobile telephony and fintech sectors have leapfrogged their more gradual evolution in other continents, the AfCFTA is evolving faster than similar economic communities did elsewhere, such as the European Union and North American Free Trade Agreement (Nafta).

Since the AfCFTA is a free trade agreement, not a customs union, it does not have a common external tariff. Its ultimate end-point aligns with Agenda 2063 for Africa, a single economic community allowing the free movement of goods, services and people.

The intersection of ESG and the AfCFTA (ESG and the African Continental Free Trade Agreement)

ESG is becoming increasingly important in global investment practices and trends. It requires the deployment of capital to projects and activities that achieve the United Nations Sustainable Development Goals (SDGs) and by doing so it also attracts capital. As the AfCFTA charts its own path for Africa, it can also take leadership on ESG issues.

The synergies between ESG and the AfCFTA are already evident in three key respects.

  1. Governance: The AfCFTA’ s key short-term gain will be to encourage foreign direct investment (FDI) into the continent. The AfCFTA will ultimately provide a comprehensive governance framework, with dispute resolution mechanisms (at state level) and investor protection mechanisms across its membership (currently 46 African countries). This provides additional comfort for investors. With this governance framework in place, more investment is expected to flow into the continent, including in manufacturing facilities.
  1. Environmental: One of the most active, and now prioritised sectors under the AfCFTA, which is seeing significant momentum, is automotive. There is already an Automotive Task Force and Automotive Strategy for the AfCFTA. Transport and logistics have also been prioritised as a sector under the AfCFTA or, more broadly, the area of mobility is gaining attention across the continent. Electric vehicles (EVs) are increasingly important globally. In Africa, there is generally broad acceptance that we are likely to see EVs led by public transport and two/three-wheel wheelers ahead of automobiles.The sector is mobilising regional value chains (RVCs) and a ‘hub and spoke’ model built on complementarity and specialisation. Finally, we are also likely to see developments in countries like Zambia and the Democratic Republic of Congo (DRC) in relation to sourcing rare earth metals for the manufacture of electric batteries.  Various countries, Regional Economic Communities (RECs), such as ECOWAS, (including Afreximbank at continental level) have automotive programmes in place, including an EV strategy. Some countries (such as Rwanda) have introduced investment and other incentives to encourage EV manufacture, others Special Economic Zones (SEZs) and import incentives for automotive manufacturers. Special economic zones are recognised as a key tool for boosting investment and trade, and we are likely to see more developments in this space.
  1. Social: The AfCFTA emphasises the importance of creating entrepreneurial opportunities for women and youth. A Committee on Women and Youth has been established and work is ongoing towards a Protocol on Women and Youth in Trade. This is a key pillar of the AfCFTA and aims to deal with the challenges that women and children face daily across the continent.

Most significantly the AfCFTA by definition aims to create not only economic but social benefits by boosting trade and attracting FDI and participation in global value chains to ultimately reduce poverty and increase shared prosperity. The AfCFTA is unique when compared to free trade areas and customs union that we have seen before.

Most significantly the Agreement establishing the AfCFTA recognises in its preamble that the importance of “clear, transparent, predictable, and mutually advantageous rules to govern Trade in Goods and Services, Competition and Intellectual Property and recognises the importance of international security, democracy, human rights, general equality and the rule of law for the development of international trade and economic cooperation.” 

 The agreement also stresses “the rights of State Parties to regulate within their territories and achieve legitimate policy objectives in areas including public health, safety, environment, public morals and the promotion and protection of cultural diversity.”

There is much opportunity for the continent under the AfCFTA to shape itself to meet our evolving environmental, social and governance challenges and to harness our innovation, youth and natural resources under a new rule-based continental governance framework.

ESG and the African Continental Free Trade Agreement 

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ESG and the African Continental Free Trade Agreement

 

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