Regional integration and trade blocs: ECOWAS, AfCFTA and the types of integration

Larry Limited, a Lagos manufacturer of household utensils, wants to sell in Accra, Dakar and Nairobi. In Accra, its goods cross the border with no customs duty. In Dakar they meet the same tariff as goods from outside West Africa would meet. In Nairobi they face a different set of rules again. Each answer comes from the trade bloc that the two countries belong to.

A tax adviser needs to know which bloc sits behind each border, because the bloc decides the customs duty, the rules of origin and often the paperwork.

This topic covers regional integration and trade blocs, the Economic Community of West African States (ECOWAS) and its common external tariff, the African Continental Free Trade Area (AfCFTA), other blocs such as the European Union (EU), the objectives and types of regional integration, and the benefits and drawbacks of blocs. The previous topic covered base erosion and profit shifting. The next covers international tax policy.

Key terms in plain English

Syllabus check

This topic is in syllabus area C (international taxation, 20% of marks). It covers:

• the meaning and objectives of regional integration and the types of economic integration;
• ECOWAS, AfCFTA and other trading blocs;
• the benefits and disadvantages of regional integration and trade blocs.

CAMA 2020 and cross-border trade

The Companies and Allied Matters Act 2020 (CAMA 2020) is the company law of Nigeria. The sections below apply to this topic.

The rules in more depth

Regional integration and trade blocs

Regional integration is a process in which neighbouring states agree to closer co-operation through common institutions and rules. The aims may be economic, political or environmental, but it usually takes the form of a political economy project in which commercial interests serve wider security and social goals. It is run through supranational bodies, through government-to-government decisions, or both.

Typical steps are removing barriers to trade, freeing the movement of people, labour, goods and capital, reducing the risk of regional conflict and agreeing common positions on the environment, climate and migration. A trade bloc is a free or near-free trade zone created by tax, tariff and trade agreements between two or more countries. More than a hundred such agreements are in place. Examples are the EU and ECOWAS.

Objectives of regional integration

1. Strengthen trade integration in the region.
2. Create an enabling environment for private sector development.
3. Develop infrastructure that supports growth and integration.
4. Build strong public institutions and good governance.
5. Reduce social exclusion and build an inclusive civil society.
6. Contribute to peace and security.
7. Build environmental programmes at regional level.
8. Strengthen the region’s links with other regions.

Types of regional economic integration

ECOWAS

Formation. ECOWAS was created at Lagos on 25 May 1975, an idea first put forward by Nigeria’s Head of State, General Yakubu Gowon, to give West Africa a single market built round an economic and monetary union. It began with five members. Cape Verde joined in 1976 and Mauritania left in 2000.

Burkina Faso, Mali and Niger left in 2024, which leaves 12 members: Benin, Cape Verde, Cote d’Ivoire, Gambia, Ghana, Guinea, Guinea-Bissau, Liberia, Nigeria, Senegal, Sierra Leone and Togo.

Objective and means. The aim is an economic and monetary union that encourages growth in West Africa. The original means are: the suppression of customs duties and equivalent taxes; a common external tariff; the harmonisation of economic and financial policies; and the creation of a monetary zone.

Fiscal policy. Most member states run structural deficits and rising public debt, and rely on external aid. Weak tax systems, a large informal sector, tax evasion and poorly harmonised tax and fiscal rules hold back growth. ECOWAS has macroeconomic convergence criteria and a common external tariff, but no common fiscal rules to support integration and raise domestic resources.

Common external tariff. A CET applies the same duties, quotas and preferences to goods entering the bloc, whichever member they enter first. ECOWAS adopted its CET in 2006, based on the four bands of the West African Economic and Monetary Union, and adopted the five-band structure on 25 October 2013.

The CET comes with trade defence measures: safeguard measures, anti-dumping measures, anti-subsidy and countervailing measures and supplementary protection measures.

AfCFTA

The African Continental Free Trade Area is meant to create a single market for goods and services across Africa. All African Union states but one have signed it, which makes it the largest free trade area in the world by number of countries. Its objectives are to:

• create a single continental market for goods, services and people;
• raise trade between African countries by removing tariffs and non-tariff barriers;
• improve Africa’s competitiveness through a better business climate, infrastructure and investment;
• deepen economic integration; and
• support sustainable development, by cutting poverty and raising living standards.

How it works. It has protocols on trade in goods, trade in services and dispute settlement; operating tools such as rules of origin, tariff concessions and an online tool to monitor non-tariff barriers; an institutional structure of the Assembly, the Council of Ministers, senior trade officials and technical committees; and a dispute settlement mechanism.

Challenges. Loss of tariff revenue and an uneven spread of costs and benefits; adjustment costs as labour and capital move; competition that can hurt smaller firms; the need for co-ordination among members; non-tariff barriers such as red tape; weak transport and energy infrastructure; and weak institutions.

Other blocs

The European Union has 27 members; the United Kingdom left in 2020. Its goals include peace and well-being, sustainable development based on balanced growth and price stability, a competitive market economy with full employment, fighting social exclusion, scientific progress, cohesion among members, respect for diversity and an economic and monetary union with the euro as its currency.

The North American Free Trade Agreement began in January 1994 between the United States, Mexico and Canada and sought freer trade, lower prices, higher standards and a market driven by supply and demand; a new agreement replaced it in 2020.

Benefits

• Trade creation. Barriers fall, so members trade more and consumers pay less.
• Employment. Freer movement of labour widens job opportunities.
• Consensus. A small group of countries finds it easier to agree, and shared background helps political co-operation.
• Private sector confidence. Less uncertainty and more credibility make it easier to plan and invest.
• Non-economic gains such as peace and security.

Disadvantages

• Trade diversion. Members buy from a dearer member rather than a cheaper outsider, and inefficient producers are shielded.
• Investment diversion. Outside investors may find a member less attractive because of the tariffs and rules against non-members.
• Employment shifts. Production moves to cheaper labour markets and workers move, which strains the resources of members.
• Loss of sovereignty. Each round of agreement can cost a state more of its political and economic rights.
• A bloc is itself a barrier to non-members.

Worked examples

1. Intermediate goods are band 2 at 10%: 10% × 50 = ₦5m.
2. Final consumption goods are band 3 at 20%: 20% × 20 = ₦4m.
3. Total duty at the CET rates = ₦9m.

1. Before.
   the import cost 90 × 1.40 = ₦126, above the domestic ₦120, so the country made its own.
2. After: the tariff is gone, the import costs ₦90 and the country buys from the partner.
3. This is trade creation, because cheaper goods replace dearer domestic output.

1. Outsider’s price with the tariff.
   80 × 1.20 = ₦96.
2. The member’s ₦95 is now cheaper at the border, so the country switches.
3. It pays ₦95 for something that costs ₦80 to make elsewhere. This is trade diversion.

1. Free movement of workers and capital with a common tariff is a common market.
2. If they also shared a currency and fiscal policy, it would be an economic union.

How to score full marks

• Define regional integration and trade bloc separately.
• List the four types in order from loosest to tightest with an example of each.
• Give the ECOWAS means, the CET bands and the defence measures.
• Balance benefits against disadvantages and use trade creation and diversion.
• Add one point on tax: duty at the CET, lost tariff revenue under AfCFTA.

Common mistakes in the exam

• Giving the four-band CET of 2006 instead of the five bands of 2013.
• Calling ECOWAS a common market when it is a customs union.
• Listing 15 members for ECOWAS after the 2024 withdrawals.
• Treating regional integration and a trade bloc as identical.
• Giving only benefits.

Quick revision

• Types: free trade area, customs union, common market, economic union.
• ECOWAS: 25 May 1975, Lagos; 12 members; CET bands 0, 5, 10, 20, 35%.
• Four means: no duties, CET, harmonised policy, monetary zone.
• AfCFTA: single continental market.
• Benefits: trade creation; risks: trade diversion, sovereignty.
• CAMA 2020: ss. 54, 55, 56, 377(1), 378.

Practice questions

These are original questions written in the style of the Institute of Chartered Accountants of Nigeria (ICAN) exam. Try each one before you open the answer. Full model answers follow the written questions.

Recall check: multiple choice

Recent ICAN papers are written, although older papers such as May 2014 included multiple-choice questions. These questions are for quick recall. The written questions that follow are closer to the exam.

Written questions

Model answers

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