African Free Trade Area Finally Launches
January 1st was a landmark moment on the African continent as it marked the commencement of the AfCFTA, it will be the largest free trade area since the formation of the World Trade Organization.
What is it?
The African Continental Free Trade Area (AfCFTA) will cover a market of 1.2 billion people and a gross domestic product (GDP) of $2.5 trillion, across all 55 member states of the African Union. The main objectives of the AfCFTA is to create a single market for goods and services, facilitate the movement of persons, promote industrial development and sustainable and inclusive socio-economic growth, and resolve the issue of multiple membership. The African Union hopes that it will be a stepping stone towards creating a continental common market akin to the European Union.
Why is it needed?
As noted in our Aviation article, the percentage of intra-Africa trade is a meagre 15 – 18%. The majority of trade is with countries outside the continent and a large majority of exports are in the form of commodities such as oil and minerals.
Non-African multinational corporations will often pay lower tariffs as their country of origin will often have favourable trade agreements with African states. Therefore, Intra-African trade is inhibited by higher tariffs and competition from multinationals with more favourable trade agreements.
AfCFTA will eliminate tariffs on intra-African trade which will encourage business on the continent to trade within the continent. The aim is for this to also drive development, industrialization and employment as trading enterprises will be created to cater to the wider consumer base. It’s estimated that the AfCFTA could boost intra-African trade by 52.3%.
How does the AfCFTA hope to achieve this?
Tariff elimination - African businesses, traders and consumers will no longer pay tariffs on a large variety of goods that they trade between African countries.
Eliminating complex trade procedures - Traders constrained by non-tariff barriers, including burdensome customs procedures or excessive paperwork, will have a mechanism through which to seek the removal of such burdens.
Consistent regulations - Cooperation between customs authorities over product standards and regulations, as well as trade transit and facilitation, will make it easier for goods to flow between Africa’s borders. Furthermore, Mutual recognition of standards, licensing and certification of service suppliers will make it easier for businesses and individuals to satisfy the regulatory requirements of operating in each other’s markets.
Access to markets - Through the progressive liberalization of services, service suppliers will have access to the markets of all African countries on terms no less favourable than domestic suppliers.
Building regional value chains - The easing of trade between African countries will facilitate the establishment of regional value chains in which inputs are sourced from different African countries to add value before exporting externally.
Remedies - State Parties will have recourse to trade remedies to ensure that domestic industries can be safeguarded, if necessary. The development of a dispute settlement mechanism provides a rule-based avenue for the resolution of any disputes that may arise between State Parties.
Will it lead to improved industrialization and employment?
Jeffrey Peprah, chief executive of Volkswagen, Ghana, said to the FT that he hoped eventually to export cars assembled in Accra to other west African countries. The reason for this assertion is that the AfCFTA will result in industrial exporters benefiting from greater market access. 75% of exports outside the continent were raw materials, less reliance on raw materials being exported to key consumers such as China offers an opportunity for more diverse export revenues.
Exports outside Africa
Reliance on raw materials ties African countries to the volatility of commodity prices which are often dictated by the consuming markets. Extractive exports, on which Africa’s trade is currently based, are less labour-intensive than the manufactures and agricultural goods that will benefit most from AfCFTA. By promoting more labour-intensive trade, AfCFTA creates more employment.
What are the possible challenges?
Undoubtedly, trade in Africa will not change overnight. Significant infrastructure development will need to continue to be implemented to complement cross-border trade, particularly road and rail. The African Union and the African Development Bank have continued to invest in infrastructure projects that will supplement the AfCFTA such as the Zambia-Tanzania-Kenya power transmission line and the Lagos-Algiers highway.
There is also a risk that more industrialized economies will be in a position to take advantage of the opportunities for manufactured goods as opposed to less industrialized economies on the continent. To counteract this, in the short term smaller economies may have to link with regional value chains and become the main source of supplies which larger industries need. For example, Small and medium-sized businesses which account for a vast majority of business on the continent struggle to penetrate external markets. With the AfCFTA, they can tap into regional markets/leaders and use this as a stepping stone to expand business later on.
How many have signed up?
54 Member States of the African Union have signed the agreement and as of writing, 34 states have ratified the agreement.
