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Jimmy Moyaha: A few weeks ago, I spoke with the head of Africa at the World Economic Forum about the developments being discussed in Africa. One such development was the African Continental Free Trade Area. [AfCFTA] The agreement was finally completed and was being implemented. And we just saw today that the South African government announced that the implementation of its preferential trade agreement was launched today in Durban by our President and the Minister of Trade and Industry.
I'm on the phone with Jonathan Fillis, global trade and excise partner at Ernst & Young Africa (EY Africa). Good evening, Jonathan. He really appreciates his time. Let's start with the significance of the agreement.
Obviously, leading up to the World Economic Forum, that's what we wanted for this continent. It's something that came out of the forums and its implementation was a pretty monumental step, and we did it right. I was able to actually implement it.
Jonathan Phillis: yes. Thanks for hanging out with me, Jimmy. I have to say that is very important. Jimmy, what I can say is that the implementation of this agreement was delayed for a variety of reasons, including, of course, the coronavirus pandemic. It took years to reach an agreement with the state.
But we really need to explain the significance of what happened today. Today, we are reminded of the many years of effort that have gone into reaching this agreement. So what happened today is that officially South Africa has started trading under this agreement.
For your information, to give you a rough idea of what this is for now, we trade with many countries not only in Africa but all over the world.
But intra-African trade, and what that really means is that countries within Africa trade with each other, Jimmy, that's less than 15%.
So what is this trade agreement going to do? The aim is to increase trade between African countries, and this agreement will achieve that. How is it done?
If it is “proudly made in Africa” and of course if the production takes place in South Africa, then you can export goods between these countries duty-free or at very low rates. You may be able to make a profit. So today is an exciting day, Jimmy, a very, very positive day.
Jimmy Moyaha: Jonathan, I would love to get back into the production side of this work. Because I think that's another thing we need to consider. But first, what exactly does this agreement cover? Do you know? Are there specific products or specific sectors? What does the scope of this agreement include?
Jonathan Phillis: Great question, Jimmy. Let me put it this way. Of course, this agreement is aimed at facilitating trade in goods. It aims to promote trade in services. And the other two areas are actually the movement of people and capital across the African continent. These are the purposes of the agreement.
Where we are now is that trade in goods is possible. That's the first thing.
Another thing I can say is that there is no industry that is not affected by this. Think of it this way, Jimmy. Every product, every item you can touch, every physical item manufactured is subject to this agreement.
Currently, up to 92% of every conceivable product can be exported.
So what am I talking about? I'm talking about vehicles, machinery, and the produce produced.
Therefore, for products that can be physically touched, up to 92% of possible products are already covered by this agreement. Of course, it is intended to cover all physical goods. So this is important.
Jimmy Moyaha: absolutely. Jonathan, on the production side that you mentioned, with this new agreement coming into effect, it clearly creates a new level of incentive from a production perspective. What does this potentially mean for countries looking at South Africa and thinking, “Maybe we should move our production operations there?''
Jonathan Phillis: yes. That's a great question. The answer, Jimmy, as the President so rightly referred to today at the launch, is something called rules of origin. I'm not going to go into detail about this, of course, but here's what it really means: Consider “Proud South Africans”. Must be locally produced. You must be able to prove that the product is locally produced.
What does that mean for production and investment? It doesn't just mean that businesses have to be South African to benefit from this agreement. No, it must be a multinational company operating in South Africa, for example a company with production facilities in South Africa and can demonstrate rules of origin. They now have the potential to export within Africa, and of course to neighboring countries on the continent, at much lower tariffs than they currently pay.
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So how do you actually attract investment? [just] That's how we boost production on the continent. Of course I'm talking about South Africa. If produced in South Africa, it can be exported to other African countries. However, other African countries implementing the agreement similarly have rules of origin when production takes place. [if] Goods can also be exported to South Africa if they qualify in terms of rules of origin.
Jimmy, the main purpose of this is actually to increase local production.
Jimmy Moyaha: Jonathan, you mentioned earlier that only about 15% to 16% of African trade takes place within Africa. Comparing this to regions such as Europe, which stands at 63%, and Asia, which stands at 55%, there is no doubt that there is still a long way to go.
But I wonder if playing devil's advocate on this side of the deal will put further pressure on our logistics network with Transnet, and whether we even have the infrastructure to cope with this? There will be some people. If there was a sudden increase in what we are exporting, or what we are importing, it would mean our ports would become even more congested, and Transnet is already under strain.
Jonathan Phillis: Once again, Jimmy, you're right. But this is actually the perspective I have and that's how I see it. So the answer is of course yes.
If production increases, exports will also increase, [and] Of course there is more demand for these [logistics] service.
But again, I'm thinking about two things. One is the president. If he didn't talk about it, that would have been the elephant in the room. And he said that directed actions were being taken regarding the general logistics of our country in South Africa.That's it [thing].
But I want to come back to this again, Jimmy. I can't stress enough what a positive day today is. Not just for South Africa, but really for the African continent. Shipping under this contract is really, really huge.
Certainly, the demand will increase further. But again, what does that mean? It just emphasizes that you need to get it right.
All of that, of course, has to work if we are to really take advantage of this agreement and actually achieve the goals that we are trying to achieve under the agreement. I agree with you, but I still think today is a very positive day for South Africa and the African continent.
Jimmy Moyaha: absolutely. And Jonathan, in keeping with his positive attitude, it's clear that we need to consider the potential long-term impact on the economy as such agreements come into force. This could very well be an agreement that increases the 1% economic growth forecast we got from the IMF just yesterday to 2%, 3%, or even 4% a year.
Jonathan Phillis: Oh, definitely, Jimmy. For those interested, well-researched articles are readily available from all over the world that prove that global trade is giving economic growth a very generous hand.
In my view, it's a solved problem, yes, of course, as you said, if I get the logistics issues and everything else right. However, I believe that if things go well based on this agreement, it should contribute to future economic growth.
You can see how excited I am about what happened today. Yes, of course it would certainly contribute to the economic growth that South Africa so desperately needs.
Jimmy Moyaha: And we desperately needed this string of good news.
It should be left alone. Thanks for your insight, Jonathan. That's Johnathan Fillis, Global Trade and Excise Partner at EY Africa, who shares the latest information from governments on the implementation of the long-awaited African Continental Free Trade Area Agreement.