Implications of the African Continental Free Trade Area (AfCFTA) and Agreement
The formation of the African Continental Free Trade Area (AfCFTA) was agreed in March while the agreement was officially signed by almost all the 55 African Union member states following a submit held in July, 2019. The agreement comes at a critical moment for Africa when there’s a desire to shift from the export of extractives (oil and minerals) to industrialized goods. The movement away from the volatility associated with receiving rent from the former is expected to create a sustainable economic growth in the region by focusing more on export of community and agricultural produce.
The AfCFTA establishes the largest free trade area in the world since the creation of the World Trade Organization in 1995. The AfCFTA will cover more than 1.2 billion people with over $3 trillion in GDP.
It was a welcomed development that President Muhammadu Buhari signed the Agreement in Niamey on July 8 which placed Nigeria as the 53rd Country in Africa to sign the AfCFTA.
Possible opportunities emanating from the Agreement
Intra-African trade (the quantum of African exports that go to other African countries) is about 17% which is extremely below its potential, compared to around 47% in America, 61% in Asia and 67% in Europe, according to United Nations Conference on Trade and Development UNCTAD and GIZ. This was due to the fragmentation of the African market, bureaucratic procedures, long waiting times at the border, cumbersome export requirements etc which resulted in Africa integrating with the rest of the world faster than with itself. However, with AfCFTA, Intra-African Trade is expected to geometrically increase.
Amid growing U.S.-China trade tensions and China’s efforts to decrease its dependency on export markets, there’s hope that Africa will be a prime successor to become the manufacturing hub of the developing world.
In addition to making payment for goods and services, there’s avenue to reintroduce trade by barter (direct exchange goods or service for another’s goods or service) and reduce pressure on local currencies.
This is a step towards removing the fragmentation of African economies and markets thereby creating regional integration, inclusive social and economic development, democratic governance, peace and security, among others.
Trade Implication of the Agreement
The agreement requires members to remove tariffs from 90% of goods, allowing free access to commodities, goods, and services across the continent
Following the above, the GDP of most African countries is expected to increase by 1% to 3% once all tariffs are eliminated according to UNCTAD and boost intra-African trade by 52.3% in 2022. While I’m uncertain about the series of practical trade facilitation measures that has informed these numbers, the ease of doing business concerns needs to be addressed in order to attract the volume of trade anticipated at a regional level by member states.
Increased sourcing of intermediate and final goods within Africa rather than import from abroad, thereby supporting the development of regional value chains and the building of manufacturing capacities in Africa.
Regional integration, through trade and industrialization, is likely to boost domestic and regional value addition.
Beyond economic benefits are the potential social impacts through the generation of additional jobs (and the transfer of skills) for the growing youth population, needed to harness Africa’s demographic dividend
This integration hopes to attract additional intra-African investments and create market opportunities to foster Africa’s industrialization
The Unaddressed Potential Drawbacks
High tariffs with Africa (which the Agreement has now addressed) and colonial-era infrastructure make it easier for African countries to export to Europe or the United States than to each other. The latter concern is still critical to the success of the Agreement. The seaports, roads, rail etc infrastructure needs to be in place for ease of movement of goods and services.
Beyond a full tariff liberalization, the cost of air transport within Africa is the most expensive in the world. This point sort of speaks to air transport/aviation cost. In conclusion, all the pointers to the ease of doing business needs to be adequately addressed to achieve the volume of trade anticipated.
Following from the above, the Single African Air Transport Market (SAATM) which is an initiative of the African Union to create a single unified air transport market in Africa, will go a long way in liberalizing the civil aviation in Africa, improving connectivity and contributing to achieving the Continent’s economic integration agenda.
There is also the issue of connectivity. As an African traveler myself, there are some African countries I can only visit by going to Europe first. There’s no direct flights connecting most major cities in Africa. This needs to be addressed as well.
Most Africans need visas to enter into another sister country unfortunately. The implementation of the African Union Passport is critical to the success of the AfCFTA. The unified AU passport will remove restrictions on Africans’ ability to travel, work and live within the continent by transforming restrictive laws and promoting visa free travel to enhance movement of all African citizens, spur economic growth, promote intra-African trade, and eventually creating a continent with seamless borders.
With the varied Currencies with Africa, and West Africa currently trying to adopt a single currency within the region called ECO, there has to be plans to adequately address settlements on the continent and reduce dependence on US dollars and other hard currencies in settlement of regional trade. One of the DFI’s, AfreximBank, has launched a new Pan-African Payment and Settlement Platform which could potentially facilitate the clearing and settlement of intra-African trade transactions in African continent.
We could only but imagine the thousands or millions of different businesses on the continent which creates a potential risk of KYC. The Agreement, which I am not privy to, needs to address or create a platform for carrying out due diligence on businesses. This will make it safer, easier and more cost-effective to onboard African businesses.
Finally, there has to be strict rules and regulations governing exports and monitoring/filtering the distribution of substandard products by questionable manufacturers. This singular issue affected the export of cocoa from Nigeria. Now Ghana and Cote d’ivoire takes the lead in exporting cocoa globally.