Thought leadership from our experts

African continental free trade and shipping

What is free trade?

It is International trade left to its natural course without tariffs, quotas, or other restrictions.

Free trade is a policy to eliminate discrimination against imports and exports. Buyers and sellers from different economies may voluntarily trade without a government applying tariffs, quotas, subsidies or prohibitions on goods and services. Free trade is the opposite of trade protectionism or economic isolationism.

Free trade in Nigeria

Is free trade new in Nigeria? Free trade is not a new phenomenon in Nigeria. Indeed there are free trade zones in Nigeria also known as Export processing zones (EPZs) – also known as free zones (FZs). These are areas in which businesses are exempt from the normal regime applicable in Nigeria, particularly with regard to Customs duty and tax. With the incentives EPZs offer to corporations, they are one of various methods used to attract foreign direct investment, increase foreign exchange earnings, promote technology transfer and develop export- oriented industry in Nigeria.

African Continental Free Trade Agreement.

On the 5th of December 2020, Nigeria deposited its instrument of ratification of the African Continental Free Trade Area Agreement thereby becoming the 34th African country to ratify the Agreement.

The goal of the Agreement is simple, to create a simple market characterized by the free movement for trade, goods and services within Africa.

The AfCFTA is also expected to enhance competitiveness at the industry and enterprise level through exploitation of opportunities for scale production, continental market access and better reallocation of resources.

The establishment of the AfCFTA and the implementation of the Action Plan on Boosting Intra-African Trade (BIAT) provide a comprehensive framework to pursue a developmental regionalism strategy. The AfCFTA contains protocols including the Protocol on Trade of Goods which deals with import and export duties, liberalization of trade and progressively eliminating import duties.

The Trade Protocol streamlines the requirements that qualify vessels to ply African waters which in turn highlights the intersect between indigenous tonnage and the benefits of intra African trade.

Shipping Criterion

Article 6 of Section II of the AfCFTA states that:

“their vessels” … shall apply only to

a) the vessel sails under the flag of a State Party; or

b) at least, 50 per centum of the officers of the vessel or factory ship are nationals of the States Party or States Parties; or

c) at least, 50 per centum of the crew of the vessel or factory ship are nationals of the States Party or States Parties; or

d) at least, [50/51] per centum of the equity holding in respect of the vessel or factory ship are held by nationals of the States Party or States Parties or institutions, agency, enterprise or corporation of the government of the States Party or States Parties”.

Flagging

Statistics show that over 90 percent of goods imported into Nigeria are carried by sea and when regard is had to economies of scale it appears to be the most cost effective mode of transport. Consequently, legislation and the supply chain in respect of Shipping has a substantial impact on Nigeria’s economy with regard to revenue and the market forces of demand and supply.

Most of the vessels that call at Nigerian Ports are owned by foreign entities. These vessels reflect the composition of the global merchant fleet which are owned by the shipping majors. Many of these vessels fly flags of convenience from other registries for commercial reasons and expediency.

Nigeria and tonnage

In 2003 Nigeria enacted a Cabotage Act 2003, to restrict the use of Foreign Vessels in Domestic Coastal Trade, promote the development of Indigenous Tonnage and to establish a Cabotage Vessel Financing Fund. This Act was geared at shoring up indigenous tonnage to partake in coastal shipping.

Although the Cabotage Act deals more with coastal shipping rather than merchant shipping outside Nigeria’s coastline the provisions of the Act included a Cabotage Vessel Financing Fund which was designed to enable Nigeria acquire indigenous tonnage.

Why is the issue of vessel ownership a crucial issue with regards to the AfCFTA?

The simple answer would be that there are economic benefits that accrue to ownership and that in itself is one of the key reasons why the AfCFTA was created. More so the benefits are regional and as such ought to be utilized by a specific demographic with a core emphasis on the movement of capital within the region.

It is important at this stage to draw the distinction between flagging and indigenous ownership. Even though a vessel may be Nigerian flagged it may very well not be indigenously owned by a Nigerian or be of African ownership. The Nigerian flag may simply be a flag of convenience. The idea of vessels plying strictly an intra -African route also impacts on issues such as the cost of marine insurance especially in more volatile areas.

The issue of ownership in contradistinction to flagging becomes important under the AfCFTA because of the criterion for liberalization and incentives enumerated therein. From the AfCFTA it has become clear that any vessel that expects free and unlimited passage to trade in the African Continental Free Trade area needs to be flagged in an African State that is a party to the Agreement and in addition has 50 percent of its crew from a state party or the equity shareholding in respect of the vessel in 50/51% equity holding in nationals of a state party.

It is interesting to observe that the requirements appear quite similar to those of the Cabotage Act in Nigeria which rather than protect coastal shipping for indigenous operators has by way of the waiver system still left Cabotage trade quite porous to foreign participation and as such has been unable to circumvent the pertinent issue of capital flight.

The AfCFTA on the other hand permits flagging and as such, foreign vessels using the mechanism of flags of convenience in State Parties will easily participate in trade and enjoy all the incentives including the unfettered passage afforded therein.

It is common knowledge that Liberia which is also a State party to AfCFTA is one of the biggest Ship Registries and as such foreign Ship owners who have registered their vessels in such registries will partake of unrestricted trade along the African transit corridor.

Needless to say there will be an increase in flagging demands in African states which will bring in some measure of revenue but quite clearly the revenue realized from flagging is much lower than the benefits derived from vessel ownership. From an economic perspective it is debatable whether flagging alone will decisively reduce the cost of regional carriage of goods by sea thereby making intra African trade cheaper in terms of transport costs. While the routes may prove shorter they may be more expensive with respect to insurance cover.

Bills of lading

The AfCFTA creates its own transit document The African Continental Free Area Transit Document which is like a bill of lading. It is a Customs Document for transit declaration approved by the African Union Ministers of Trade and to be utilized within the African Continental Free Trade Area;

The Document raises several questions. Is it just a transit document or will any liability accrue based on the fact that it enumerates cargo on the face of the document similar to a bill of lading? In terms of carriage regimes will it be governed by the international carriage conventions or strictly subject to the dispute resolution mechanisms within the AfCFTA? Noteworthy is that no mention is made of limitation of liability within the transit documents. Where do standard forms stand in the face of this new innovation and as between the Parties can vessels that issue standard form bills of lading still ply the African Transit route if a compulsory requirement for carriage is the AfCFTA Transit Document? Will both documents operate simultaneously with one operating as a title document/receipt while the other operates as a mere passage licence? All these are matters that will need to be unraveled and judicially tested upon the coming into existence of the Agreement in our Climes.

Conclusion

At the heart of the AfCFTA is gleaned a medium aimed at bolstering economic, industrial and regional value chain development. Are the relevant drivers required to actualize the ethos of the agreement present? What can be done to build capacity to achieve the aim?. If Africa intends to establish a continental market for goods through intra Africa trade it must strategically build capacity in respect of vessel ownership. It must invest in ship building and increase its maritime asset base to enable it have a market share in the global fleet. To emerge as a viable trade hub there must be a decisive shift away from mere flagging of foreign operators to a deliberate investment in vessel ownership by African entities. Only then will African economies be positioned to play a key role in creating, utilizing and investing the revenue that comes from carriage of goods by sea in Intra Africa trade.