What the African Continental Free Trade Area deal means for the region

Although trade flows among African states remain below their potential, an ambitious project is under way to accelerate economic integration and significantly expand intra-continental trade. Spearheaded by the African Union (AU), the African Continental Free Trade Area (AfCFTA) agreement was signed in March 2018 and aims to reduce both tariff and non-tariff barriers to trade. As of December 2019 the AfCFTA had the backing of 54 out of the 55 member states of the AU.

With the legal framework now signed and ratified, trading under AfCFTA was scheduled to commence in July 2020. However, the Covid-19 pandemic has led to a delay in the implementation of the agreement. In April 2020 Wamkele Mene, secretary-general of the AfCFTA, told Reuters that he was confident the deal would eventually proceed, and that intra-African trade would help countries develop stimulus packages to alleviate the effects of the pandemic. Despite the disruption, in June 2020 the Secretariat of the AfCFTA announced that it was actively working to build regional value chains to benefit African countries once the deal is implemented. The same month Mene said in a webinar held by the Africa CEO Forum that the agreement may commence on January 1, 2021. However, this date is subject to the spread of the virus across Africa.

Major Deal

The agreement stands to make the regional bloc the world’s largest free trade area in terms of the number of participating countries since the creation of the World Trade Organisation in 1995. It is expected to have a transformative impact on participating markets, with the agreement set to increase intra-African trade by 52% by 2022, according to a 2018 report from the UN Economic Commission for Africa (UNECA). The UN Conference on Trade and Development (UNCTAD) forecasts a range of long-term benefits from the full implementation of the deal, including overall gains of around $16.1bn per year and the halving of the continent’s trade deficit, along with GDP and employment growth of 0.97% and 1.17%, respectively.

Building Blocks

Of the 55 members of the AU, only Eritrea has not signed, and 27 states had ratified the agreement as of December 2019. Eritrea’s reluctance to join the bloc stems from a historic border conflict with neighbouring Ethiopia, an issue that reached resolution through a July 2018 peace deal brokered between the two countries. Following the cessation of hostilities, Eritrea formally acceded to trade talks and is expected to join the bloc in the near future.

The agreement enshrines the continent’s eight pre-standing Regional Economic Communities – regional trade blocs, each established under a separate treaty – as the “building blocks” of the AfCFTA. Many of the precise details are still being finalised, set back by the disruption caused by Covid-19, with the deal’s different elements being discussed and implemented in phases. The first phase focused on goods and services liberalisation, while the second phase – which began in February 2019 – covers investment, competition policy and intellectual property rights.

A significant milestone for the deal came in July 2019 at a session of the Assembly of the AU. At the meeting, countries agreed to remove tariffs on 90% of goods, with provisions being made to protect 3% and phase out tariffs on the remaining 7% over a 10-year period. The summit also marked the moment when the agreement became operational, with the introduction of five key mechanisms aimed at facilitating the implementation of the free trade area. These covered online negotiations, trade information, a rules-of-origin regime, a payments and settlement system, and procedures for monitoring and eliminating non-tariff barriers. It was also agreed that the AfCFTA Secretariat – an autonomous body responsible for coordinating the implementation of the agreement – would be established in Accra, Ghana.

Perhaps most significantly, the meeting saw Nigeria sign the AfCFTA. Securing the participation of Africa’s largest and most populous economy marked a significant achievement. Nigeria’s signature followed a lengthy domestic consultation with trade unions and private businesses. The country accounts for 17% of Africa’s GDP, ranking just ahead of South Africa, and with a domestic market nearing 200m people – as much as Ethiopia and Egypt combined – its involvement is set to significantly bolster the AfCFTA’s strength and size.

Market to Serve

The deal comes at a time of increased demand for goods and services on the continent. With a population of nearly 1bn people and an increasingly numerous and affluent middle class, the African market is expanding rapidly and presents significant potential for the future. Indeed, by 2030 the continent’s middle- and high-income cohorts are expected to grow by 100m to reach 160m, according to figures from the International Finance Corporation. Such a rapid expansion of higher-income groups will significantly boost and diversify demand for goods and services. The AfCFTA implementation therefore represents a chance to support regional production and reduce over-reliance on external trading partners.

The population of Africa as a whole is expected to rise to 1.7bn in 2030 and 2.5bn by 2050, with 26% of the world’s working-age population set to be living in Africa by 2050, according to figures from the UN. Conversely, the working-age populations of Europe and China are on track to decline significantly over the same period. Concurrent urbanisation should see the population of the continent’s cities double, reaching approximately 760m by 2030 and 1.2bn by 2050.

The continent’s rapid economic expansion has been well documented since the turn of the century. The economy of Sub-Saharan Africa grew from $300bn in 2000 to $1.6trn in 2017, mostly driven by high service sector growth, which expanded by an average of 6.6% per year over the last decade. The continent is now home to some of the world’s fastest-growing markets: the IMF forecast impressive GDP growth rates in 2019 for Ghana (8.8%), Ethiopia (7.7%), Côte d’Ivoire (7.5%) and Djibouti (6.7%). The business environment has also improved. Sub-Saharan Africa has introduced a number of reforms in recent years, which is helping improve the ease of doing business in the region. The average time to register a business fell from 59 days in 2006 to 23 days in 2019, for example.

Business executives across Africa are broadly optimistic about the future. In OBG’s most recent Africa CEO Survey, which interviewed 787 top executives in eight continental markets in 2018, 72% thought that the AfCFTA would have a positive or very positive impact on intra-regional trade levels. These developments are collectively providing significant opportunities for both regional and international businesses and investors.

Manufacturing Boost

The agreement should also bring multiple benefits to African citizens and entrepreneurs. It can help to substantially drive muchneeded job creation – particularly in manufacturing; industrial exports are forecast to benefit most from the agreement, according to UNECA. In 2018, 60% of the continent’s population was under the age of 24, while only 3m jobs were created for the 10m-12m young Africans entering the job market every year.

Generating jobs and higher rates of employment is therefore urgently needed to advance social and economic prosperity. The implementation of AfCFTA has the potential to double the size of the manufacturing sector, creating 13m-16m new jobs and helping to bridge the employment gap, according to figures from US-based think tank The Brookings Institution.

Nevertheless, the continent faces a number of hurdles that it will need to overcome in order to achieve this potential. Africa currently has low manufacturing and processing capacity, with limited integration in global value chains. Furthermore, its main exports are oil and minerals, which are often processed outside of their country of origin as many states have not yet established the necessary industries to refine them.

The creation of regional value chains can help to expand industrial capacity and increase the value of Africa’s exports. Indeed, development models dependent on the export of primary commodities have proven vulnerable to price volatility. In 2018 more than 75% of external exports were extractive goods, according to UNECA. For example, cocoa accounts for one-third of Côte d’Ivoire’s export earnings, while crude oil comprises 95% of Nigeria’s total exports. This subjects these economies to changes in market prices and other exogenous shocks. It also has a negative impact on employment, as extractive activities are less labour-intensive than manufacturing and processed goods.

Powerful Voice

The AfCFTA agreement could further enable signatories in their transition towards a collective bargaining bloc, negotiating as one market and strengthening Africa’s common voice in global trade deals. This would support negotiations with major powers such as the EU and China, with whom African countries usually negotiate as single entities.

Collective bargaining would help to boost Africa’s trading position in the international market and strengthen its appeal as a global trading partner. With Nigeria and South Africa now signed up, negotiating with the AfCFTA will provide greater access to the largest economies in the region.

Overcoming Obstacles

While opportunities abound, questions remain over the pace and extent of the AfCFTA’s implementation. The continent is highly fragmented, with its composite economies at significantly different stages of development. African nations have long suffered from a lack of economic integration and regional cooperation, much of which is a holdover from colonial era trade structures and transport networks. One major problem is that transport and telecoms infrastructure connecting Africa and the rest of the world is more developed than it is within the continent itself. Furthermore, many African countries’ bilateral relations are starting from a relatively low level. Despite attempts to seek closer regional integration, this goal has so far remained largely elusive, and fragmented trade structures have persisted.

Creating Links

The most critical enabling factor for the AfCFTA will therefore be infrastructure. This will require scaling up investment and improving connections between and within countries so goods and services can access markets. The African Development Bank estimates that an annual infrastructure investment of $130bn-170bn is required across the continent, but highlights that there is currently an annual financing gap of $68bn-108bn. These figures are only set to increase further, as economic development advances and populations expand. Nevertheless, international investment, particularly from China, has provided some relief. Between 2005 and 2019 the country’s investments and contracts in sub-Saharan Africa totalled over $300bn, with the lion’s share of this capital going to construction and infrastructure projects.

While North Africa has traditionally looked to Europe, the US and the Middle East for its main trading relations, Morocco is now looking to further position itself as one of the main exporters of the continent’s goods. It is actively seeking to strengthen its trade links with other states on the continent and has increased investment in sub-Saharan African countries. The signing of the AfCFTA has also made Egypt a more attractive destination for investment, particularly from Asian investors looking for greater access to other African markets.

Abandoning Protectionism

While free trade introduces multiple benefits for participating countries, there are also costs associated with the transition to a more liberalised trading framework. Major concerns include the uneven distribution of benefits from free trade and a lack of preparedness for heightened levels of market competition, sparking calls for protectionism.

Nigeria’s hesitation to sign the AfCFTA agreement and the recent closure of its land borders serve as prominent examples of such opposition to liberalisation. In October 2019 the country closed its land borders to all movement of goods in an effort to curb rice smuggling and protect domestic farmers from cheaper imports. This has raised some concerns over the prospects for further integration and free trade across the region, especially as the border closure occurred just three months after Nigeria signed onto the AfCFTA deal.

While the country remains hesitant to undermine local manufacturers and entrepreneurs, it nevertheless has a great deal to gain from increasing its access to the wider African market. To avoid further incidents of this nature, effective instruments need to be put in place across the continent to effectively manage the transition to trade liberalisation. Furthermore, efforts need to be made to ensure a uniform level of compliance on tariffs across Africa’s Regional Economic Communities.

As greater trade integration is achieved, certain domestic firms and groups of workers will undoubtedly face pressures. In order to avoid a backlash to the AfCFTA, each state will need to implement policies to ameliorate the worst impact of these trade shocks, such as trade adjustment assistance programmes and social policies to protect workers who may lose their jobs in the face of new competition. Ensuring that businesses are able to adjust to market pressures should be a top priority for signatories of the deal, given the political consequences of inaction in this area. The Nigeria border closure incident also indicates that institutional arrangements will be required for the effective settling of trade disputes. These short-term but significant transition costs will be a challenge for African leaders.

Greater Cooperation

In order to successfully implement the AfCFTA deal, continuing cooperative efforts will be required. The deal will take time to manifest on the ground and for businesses and citizens to experience the full benefits. Investment in both infrastructure and human capital will be necessary alongside the implementation of the agreement. Improving governance and transparency will help to enhance the business climate, while investing in education will bring much-needed skills in science, technology and the digital economy. Greater efforts to resolve security issues and regional conflicts will also be important, as will the creation of institutions to effectively deal with trade disputes. While full realisation of the AfCFTA will take time, the signing of the deal shows that the will exists.