01/03/2021 – Trends in Trade / AfCFTA / Africa / Free Trade
AfCFTA: Africa's game-changer for intra-regional trade
The African Continental Free Trade Area (AfCFTA), which came into effect at the start of 2021, is being touted as a landmark trade agreement with the potential to transform Africa by ushering forth a new era of integration, prosperity and peace for the continent.
The vision of a ‘United States of Africa’ – of harmonised systems, dismantled boundaries and a much greater level of intra-continental trade – is something that Ghana’s first President, Kwame Nkrumah, long dreamt of. Over six decades since leading his country to independence, Nkrumah’s dream has now have moved closer to reality.
Coming into effect in January this year, the so-called African Continental Free Trade Area (AfCFTA) framework binds together the biggest number of member countries of any trade agreement since the establishment of the World Trade Organization (WTO) over one-quarter of a century ago.
Proposed by the African Union (AU) back in 2012, and since touted as one of the body’s key projects, the new agreement forms part of a vision to transform the continent into a global economic power in the decades ahead. All African countries bar the small north-eastern nation of Eritrea have signed the agreement – and 35 nations have already ratified it.
A major big boost to Africa’s GDP
Certainly, many economists have been quick to espouse AfCFTA’s transformational potential, with the World Bank forecasting that the new agreement could boost Africa’s GDP by as much as seven per cent (nearly US$450bn) by 2035 – the outcome of driving down import tariffs, although more crucially also scrapping non-tariff barriers.
AfCFTA is also expected to prove enormously beneficial in the drive towards more equitable growth – altering the way that income is distributed and potentially lifting some 30 million people out of extreme poverty, as well as elevating 68 million more Africa citizens out of moderate poverty.
Encouraging intra-continental integration
Clearly, such an agreement has been much needed to improve on the woeful level of integration that currently exists between Africa businesses. The legacy of the continent’s colonial past continues to loom large, manifesting in Africa’s continued strong reliance on external trade partners in Europe, Asia and elsewhere. Today, a measly 16 per cent of Africa’s trade is intra-regional – compared to 60 per cent for Asia and 68 per cent for Europe.
While it is true that several regional trade agreements already exist across Africa, high tariffs have long divided the various pacts. In the East African Community deal, for example, exporters from the six member countries face an average 16-per-cent levy on products shipped to the Arab Maghreb Union in North Africa. While regional trade blocs will continue to exist under the new free-trade agreement, AfCFTA will offer an Africa-wide regulatory framework aimed at harmonising intra-continental trade.
Removing barriers, dismantling bottlenecks
One of the first ways in which AfCFTA will tackle obstacles to intra-regional trade is by removing tariffs on 90 per cent of goods within a 5–10-year timeframe (tariff-reduction schedules, alongside rules of origin, are still being finalised). Other challenges such as non-tariff barriers – including complex customs procedures, excessive bureaucracy and corruption – have long hindered intra-African trade. In East Africa, for instance, Mozambique’s custom officers routinely charge drivers from Swaziland 500 meticais (around US$7) for vehicle inspections that are rarely performed.
It is anticipated that AfCFTA will help Africa’s businesses to overcome such non-trade barriers. An online portal has been established as part of the agreement, the intention being that companies can report any such obstacles they face and nominated government officials will marshal such complaints and work to dismantle the bottlenecks hindering such trade.
AfCFTA and private sector key to unlocking Africa’s potential
Of course, one of the biggest current challenges to trade activity the world over is Covid-19. Yet AfCFTA could do much to help drive the continent’s economic recovery from the deadly pandemic and spur transformation, according to the ECA’s Regional Integration and Trade Division Director, Stephen Karingi.
In remarks during the annual meeting of PIDA – the African Union’s strategic framework for regional and continental infrastructure development – held in Addis Ababa in January, the ECA Director said that given Africa lacks the fiscal space for trillion-dollar stimulus packages as it attempts to ‘build forward better’ from the impact of Covid-19, AfCFTA – driven by the private sector – was going to be key in unlocking Africa’s potential. “In other words, the financial liberalisation on the continent foreseen in AfCFTA will lead to financial integration and deepening,” said Mr Karingi, adding the long-term prospects that AfCFTA will bring cannot be underestimated.
“It will allow countries to accelerate reforms. It is also catalytic, acting as a platform for leapfrogging services liberalisation. Phase II of the AfCFTA makes this possible as it enhances competition, creates a common investment area, and rewards and protects innovators,” he added. “The Covid-19 pandemic has demonstrated the importance of efficient services, including those that are digitally delivered.”
A crucial endeavour for the continent
If AfCFTA is to fulfil its potential in diversifying and transforming African economies in an inclusive manner, African countries must develop effective policies and strategies for exports, and identify new opportunities for diversification, industrialisation, and value chain development. Furthermore, although the AfCFTA can address many important demand-side constraints to trade, particularly those linked to market size, supply-side constraints must also be addressed.
Notably, while AfCFTA is undoubtedly a positive step in terms of boosting trade across the continent, not all of Africa’s nations are presently in a position to benefit from the new deal. In some countries, woeful transportation networks and storage infrastructure, alongside inefficient customs procedures, hold back the intra-regional trade potential that AfCFTA promises, while years of violence and regional disputes also continue to hinder such activity. On top of that, Africans must be equipped with the skills needed to engage in skill-intensive manufacturing industries such as apparel and machinery.
Undoubtedly, the success of AfCFTA will hinge on political co-operation. African leaders know that change will not happen overnight, with the body’s Secretary General himself describing the task ahead as a “daunting” one. However, integrating Africa’s markets is clearly also a crucial endeavour – one that will help to ensure the continent’s economic stability and sustainability in the decades ahead.