African heads of state adopted a draft protocol to regulate digital trade within the continent in February 2024.
This significant yet challenging course for Africa’s digital economy fits into the broader African Continental Free Trade Agreement Area, designed to create a single continental market for the free movement of goods, services, capital and people.
What is Digital Trade, and how big is it in Africa?
Digital trade refers to the cross-border exchange of goods, services and other tradable items that is enabled by digital technologies.
Africa’s market share of the digital trade globally is small, but it has expanded rapidly, outpacing the global average.
This, coupled with low intra-continental trade, the presence of 11 of the world’s fastest-growing economies, and a young, digitally eager population of almost 1.5 billion, positions Africa as having the world’s largest untapped digital growth potential.
What’s in the Protocol?
The protocol represents a consolidated pan-African approach to digital trade issues, paving the way for regulatory convergence and common standards.
It stipulates rules for both traditional trade and digital trade-specific issues. Digital trade-specific issues include data governance, business and consumer protection, digital trade facilitation and digital inclusion.
For most of these specific issues, the protocol establishes a series of national-level implementation obligations. Sometimes it is quite specific. For example, it mandates governments to ensure private entities adopt and disclose their personal data protection and cybersecurity policies. In other areas, it grants wide discretion, such as determining the adequate level of data protection.
Importantly, the protocol sets a default allowing the free flow of data. This means that, generally, firms must be allowed to transfer data, including personal data, outside Africa. Also, it bans data localisation, meaning firms cannot be required to store and process data locally.
It also bans customs duties on digitally transmitted products. And it prohibits governments from forcing firms to reveal their software’s source codes.
Why does it matter?
It’s significant because there aren’t global rules governing digital trade. Ninety countries are discussing regulations under the World Trade Organisation’s Joint Initiative on E-commerce, but so far without results.
This leads to two primary issues.
First, existing trade categories (services, goods and intellectual property) don’t cover all items whose trade is digitally enabled. Some are left unregulated. Examples include smart devices (like smartphones and smartwatches), value packs (like combined internet and TV services), and purely digital items (such as files for 3D printing, electronic books and video games).
Second, existing World Trade Organisation agreements don’t address digital trade-specific issues such as data protection, cybersecurity or digital payments. This complicates digital transactions across borders.
This fragmented regulatory landscape leads to legal uncertainties and high compliance costs. The protocol thrashed out for Africa aims to address these gaps.
What are the three biggest benefits for African countries?
First, it will strengthen African digital firms.
Greater alignment of national regulations across Africa will increase legal certainty and increase interoperability across the continent’s systems. This will enable smoother cross-continental data flows and, in turn:
- Reduce compliance costs, especially benefiting smaller enterprises;
- Improve access to regional and global supply chains;
- Foster collaboration across jurisdictions; and
- Build online trust.
Improving the business climate in this way will help position African digital firms and start-ups for growth and possibly disrupt monopolistic markets. It is also likely to lead to international firms setting up local operations.
Second, it will level the playing field between African countries.
In the absence of common standards and regulations, firms can be tempted to gravitate towards regions with less stringent rules to reduce costs and increase profits. This can undermine policy objectives. This is particularly true in critical areas like data protection, which safeguards user privacy. Some countries might lower their standards to attract foreign direct investment.
Third, it would increase Africa’s impact on global digital trade rule-making.
Global digital trade rules are mostly shaped by a small group of developed countries. By consolidating their position and forming a cohesive bloc, African countries can:
- Strengthen their collective voice and increase their influence in trade discussions, for example, about digital infrastructure, capacity building and equitable access to technology;
- Participate more confidently in various trade negotiations, pushing for developmental-focused agreements;
- Better withstand external pressures for advanced commitments in bilateral deals.
What are the Potential Drawbacks?
The biggest concern is that integrating African digital economies might exacerbate the unequal distribution of benefits. This could lead to heightening inequalities on three fronts: between Africa and other regions, between different African states, and within African countries themselves.
A key issue is that the protocol may trigger competition among African countries. They could enter individual free trade agreements with external parties that initiate a race to the bottom in regulatory standards as countries attempt to attract foreign investment. This may result in the creation of regional “data hubs” favouring established dominant digital players.
The US-Kenya Strategic Trade and Investment Partnership is an example of a deal that might have unintended consequences.
What’s needed are complementary policies in areas such as competition and tax law, alongside special and differential treatment provisions to ensure equitable development.
Another significant issue is the potential reduction in a government’s ability to protect its citizens.
First, the protocol’s preference for unrestricted data flow as the default is at odds with shifting global standards. It might prevent countries from controlling how their citizens’ personal data is sent abroad. As a result, major tech companies from outside Africa but operating within it could end up controlling this data.
Read: New global tax rules may see African countries losing out, again
Second, the ban on mandatory software source code disclosure may limit the ability of countries to regulate AI technologies effectively and hinder technology transfers that benefit local start-ups. It could also restrict the ability to scrutinise social media algorithms to protect children from harmful content.
What are the Biggest Barriers to Implementation?
Capacity constraints. Many countries – particularly less developed ones – face significant challenges due to a lack of knowledge and budgetary constraints needed to develop supportive regulatory national-level frameworks. Countries lacking current laws will need substantial help.
Pending detailed annexures. The protocol calls for further details in yet-to-be-developed annexures on key issues. The absence of these detailed guidelines could delay the full implementation of the protocol.
Infrastructural barriers. Many African countries have infrastructural barriers to digital trade. These include poor broadband and internet connectivity, unstable electricity supply, unreliable payment systems and general logistical challenges.
The path to making the protocol effective is indeed long. It requires addressing these substantial hurdles to ensure successful implementation.
