By Ronak Gopaldas - Signal Risk
What is it?
The African Continental Free Trade Agreement (AfCFTA), signed by 44 African countries in Kigali, Rwanda, in March 2018, is meant to create a tariff-free continent that can grow local businesses, boost intra-African trade, rev up industrialisation and create jobs.
The agreement creates a single continental market for goods and services as well as a customs union with free movement of capital and business travellers. Countries joining AfCFTA must commit to removing tariffs on at least 90% of the goods they produce.
With palpable excitement that the dream for a continental free trade area in Africa is edging closer to reality, it is now time to assess what this really means in practical terms.
This agreement is being spoken about as a game-changer. Why?
There are three key reasons behind the optimism:
- Size and scale
If all 55 African countries join a free trade area, it will be the world's largest by number of countries, covering more than 1.2 billion people and a combined GDP of US$2.5 trillion, according to the UN Economic Commission for Africa (ECA). The ECA adds that intra-African trade is likely to increase by 52.3% by 2020 under the AfCFTA.
In April 2019, The Gambia became the 22nd African country to ratify the African Continental Free Trade Area agreement (AfCFTA), meaning the bill now has the minimum number of ratifications needed to come into effect. In the past, initiatives launched by the African Union have been slow and cumbersome and plagued by bureaucracy and lack of political will. However current progress and the collective, aspirational nature of the initiative has been a refreshing and welcome change. Political momentum too has shifted overwhelmingly in favour of AfCFTA which led to this groundswell of optimism that something tangible is imminent.
- African agency
The signing of the AfCFTA comes at a time when the benefits of trade are actively contested, and global powers that traditionally promoted trade as a crucial driver of growth are now calling into question its very tenets. Yet despite this, progress on this initiative by Africa policymakers has been rapid and significant.
For the first time in a long time, African policymakers and leaders are taking the initiative to chart their own course and develop African solutions to African problems, amid a changing global landscape where protectionist impulses are on the rise.
This is significant. Although there is still a lot of work still to be done, the progress achieved to date should not be scoffed at. The proof however will be in the proverbial pudding – the implementation.
How will businesses and consumers benefit?
UNECA projections suggest that enhanced regional and continental integration could give rise to dynamic gains across six main areas:
- Enlarged regional markets that provide incentives for foreign direct investment and private investment, particularly through the development of regional infrastructure projects;
- Greater efficiency and competition, making African markets more competitive at a global level;
- Increased welfare, including higher levels of investment and employment;
- Higher levels of intra-African trade, owing to a convergence in standards, harmonisation efforts and so on at a continental level;
- Diversification of products away from commodities and towards higher levels of industrialisation;
- Possibility of sub-regional political stability and peace becoming more widespread as a result of deeper infrastructure, economic and trade arrangements among African countries.
Does this initiative even make sense given the lessons from the Eurozone?
Many commentators remain sceptical about the initiative, questioning whether it is a good idea in light of the problems experienced by the Eurozone in the past few years. Indeed, there are some obvious pitfalls that need to be avoided in the design, monitoring and implementation of AfCFTA.
Two issues in particular will need to be carefully navigated if it is to be successful:
One of the major challenges to harmonising Africa’s heterogeneous economies under one agreement is the wide variation that exists in their levels of development.
For example, Egypt, Nigeria, and South Africa together account for well over 50 percent of Africa’s cumulative GDP, while Africa’s six sovereign island nations collectively account for just one percent. The different economic structures and levels of industrialisation mean that there is significant concern around the smaller and less competitive countries being over-run by the larger continental powerhouses – thus exacerbating inequality and economic divergence. It is therefore essential that participating countries build an efficient and inclusive institutional architecture so as not to leave any economies behind. Without sound policymaking and preferential treatment to Africa’s most at-risk economies, the AfCFTA could prove to be a force for economic divergence rather than a force for good.
- Political consensus
The other important aspect will be getting buy in from both politicians and the public at large around the benefits of this arrangement. Unlike in Europe, where push and pull factors post World War 2 led the population to realise they were stronger together than apart, a broad-based consensus does not yet exist for regional integration in Africa amongst the general populace. Although forthcoming from technocrats, the key to this arrangement’s success will be in convincing sceptical bureaucrats and ‘average joes’ about the long-term benefits and prosperity AfCFTA will deliver.
Forging ahead with this agreement will also require huge trade-offs from political leaders – both in terms of having the vision to think beyond short term election cycles, but also in ceding sovereignty in policymaking.
Aligning continental objectives with a domestic agenda will not be an easy task, especially in a context of rising global populism and nationalism and where protectionist approaches are being advocated such as in countries like Nigeria and Tanzania.
Who are the big winners and losers?
According to Vera Songwe, Executive Secretary for the Economic Commission for Africa (ECA), “analysis shows that the AfCFTA is win-win for all countries, big and small, agricultural and industrial, landlocked and coastal, in regard to both increases in exports and overall welfare or GDP.”
Indeed, the more industrialised are well placed to take advantage of the opportunities for manufactured goods, whilst the less-industrialised countries can benefit from linking into regional value chains. Such regional value chains would involve larger industries sourcing their supplies from smaller industries across borders.
From a country perspective, Africa’s most diversified economies, such as Ethiopia, Rwanda, and Côte d’Ivoire, are likely to benefit most from the free-trade zone in the near term. Additionally, countries like South Africa and Kenya, with larger manufacturing bases and more developed transport infrastructure, are likely to benefit from greater economic integration while Ethiopia, with its quickly growing manufacturing sector, could use the AfCFTA to build new and improved export destinations for its products and services across the continent and beyond.
For SMEs, the benefits are significant. These businesses’ participation in cross-border trade is very limited due to tariffs and non-tariff barriers which include complex customs and trade procedures, lack of access to finance, high transportation costs and lack of access to information, among others. The proposed changes would level the playing fields and reduce costs, while increasing the ease of doing business - allowing such business to have greater reach. The agreement will put measures in place that allow companies to tap regional markets that they might not otherwise access through preferential trade regimes, transit and customs cooperation, and tariff reductions on intermediate and final goods. These measures should improve the risk-return profiles of participating countries and bring new investors to the table.
What comes next
The announcement that Nigeria has finally signed the African continental free trade agreement after a long period of holding out is a significant milestone and boosts the credibility of the arrangement, further building on the momentum that has already been achieved. However, this is still a technocratic agreement and while the extent of progress so far is certainly positive, it remains largely aspirational with many practical and design issues still to be resolved.
That said, the entry into force of the agreement paves the way for the next step. What is now required is a clear operational framework which outlines timelines and deliverables. Amongst the largest issues which need to be clarified are those pertaining to rules of origin, non-tariff barriers, the complexity of existing trade agreements and the most favoured nation principle. Later, signatory states will enter into phase two of negotiations, which will tackle matters relating to investment, competition policy, and intellectual property rights.
The zone is expected to become operational from July 2020, according to AU Trade and Industry Commissioner Albert Muchanga.
Ultimately, the political will to drive implementation is what most observers are watching to see whether policy makers are able to execute on these lofty ambitions.