As the US and China are engaged in a trade war, and debates about the unpredictability of relationships between the EU and Britain continue to linger, the continent of Africa is taking steps to create a close-knit relationship to realise the vision of the African Union and Agenda 2063. On May 30, 2019, the African Continental Free Trade Agreement (AfCFTA) came into force after being ratified by the parliaments of 24 countries. The CFTA is an attempt by the African governments to “unlock Africa’s tremendous potential” and deliver prosperity to all Africans.
AfCFTA seeks to create a single unified African continental market for goods and services with free movement of business, people and investment. The AfCFTA will bring together all 55 member states of the African Union covering a market of more than 1.2 billion people and a combined GDP of more than $3.4 trillion. In terms of the number of participating countries, the AfCFTA will be the world’s largest free trade area.
A single market for goods and services enables free movement of goods, services, and labour from one country to another. Trade among the 55 African Union member states is only 18% of the total exports from the continent. A free market improves these numbers prodigiously. Improved intra-continental trade would benefit the consumers across the continent, as the goods and services would become relatively cheaper. This increases the real income of consumers, part of which again is spent. The ambitious project seeks to remove tariffs on 90% of the goods traded between the signatories to the agreement, and gradually eliminate other non-tariff barriers to trade in goods and services. As an economist would argue, removal of these barriers would increase the producer and consumer surplus, and overall efficiency of these economies.
The manufacturing sector is the backbone of Africa. The new agreement promotes competition among the firms and aids Africa in unlocking its true potential and thus boosting its export of manufactured goods to the rest of the world. The relatively small size of many African markets is one of the reasons that inhibit private sector investment. A unified market will enable the continent to attract foreign direct investment. By and large, these would lead to an increase in consumption and investment components and add to an overall increase in GDP. By 2030, the African market size is expected to reach 1.7 billion people, with a combined consumer and business spending of $6.7 trillion
A study by UNCTAD concedes that the long term monetary benefits that AfCFTA shall yield are annual welfare gains as high as $16 billion. Estimates from the UN Economic Commission for Africa (UNECA) suggest that the AfCFTA has the potential to boost intra-African trade by 52.3%. There’s a substantial amount of evidence to show that free movement boosts the economies of countries. A study has shown that nations could increase their per-capita GDP growth by 12%, simply by being a member of the European Union.
The AfCFTA document says one of its goals is to “foster a competitive manufacturing sector and promote economic diversification”. Even as 43% of the goods traded within Africa are from the manufacturing sector, it represents only about 10% of the total GDP in Africa, lagging behind other developing countries. Africa’s low level of intra-regional trade is one of the reasons for the continent’s enduring poverty and lack of a strong manufacturing base. The African economies can, therefore, leverage their gigantic population size of 1.2 billion to expand their manufacturing sector and gain a comparative cost advantage over other nations.
Apart from AfCFTA, there are some Regional Economic Communities (REC) in Africa such as ECA, SADC, ECOWAS, and COMESCA. While ECOWAS was quite successful, the other blocs have problems. Disputes continue to hamper relations and drive the countries toward not honouring agreements. For instance, Kenya and Tanzania, both members of ECA, have been engaged in a trade war. Tanzania has been known to kick out Kenyan executives and impound Kenyan imports at the border, in violation of ECA rules. While Tanzania scrapped preferential access to Kenyan textiles, Kenya allowed goods from Export Processing Zones to be sold in local markets, which prevented Tanzanian goods from being competitive. Members of COMESCA, Kenya, Tanzania and Uganda have also been blaming each other for exploiting the low import duties on sugar. That AfCFTA doesn’t have a clause to repeal all the existing trade blocs would prove a real challenge as it creates ambiguity. Then there is also the threat of countries acting in favour of their trading partners from “the regional blocs.” The success of the agreement depends on how efficiently the AU deals with these RECs.
AfCFTA is to face some more challenges. The two largest economies of Africa, Nigeria and South Africa haven’t ratified the agreement yet. South Africa has assured that it would sign it once domestic legal requirements have been satisfied. However, Nigeria backed out from signing the agreement citing “the agreement would drastically affect the small business sector of the country.” “We will not agree to anything that will undermine local manufacturers and entrepreneurs, or that may lead to Nigeria becoming a dumping ground for finished goods,” Nigeria has stated. The pervasive nature of Small and Medium Enterprises (SMEs) in virtually every sector of the Nigerian economy and their place in national development is conspicuous. SMEs in Nigeria are believed to account for about 40% of GDP and 70% of industrial employment. Rice is also a factor that is preventing the largest African economy from signing the deal. Due to various government initiatives, rice is starting to command 40% more price than what it used to 3 years back in the Nigerian markets.
Interestingly, Nigeria would largely benefit from signing the deal. With a rapidly growing population of almost 200 million, Nigeria has more workers and consumers than anywhere in Africa. For many businesses, there is no other place in Africa that can offer such a scale. This will provide a competitive advantage to Nigeria in firms’ considerations of where to set up facilities and do business. AfCFTA will expose local Nigerian firms to better practices and technologies, often through partnerships with the MNCs and sometimes through competition. This sort of exposure will challenge entrepreneurs in the country and give them greater access to the skills and partnerships they need to be dynamic in today’s world. By giving businesses access to a larger market beyond their home country, the trade agreement would allow the establishments in Nigeria (that are not profitable now) to take advantage of the economies of scale and industries to take advantage of the growth in intra-Africa relations. Remaining a non-signatory to the agreement might cost Nigeria dearly. The country’s isolation makes it difficult for local businesses to scale abroad, thus making them less attractive for foreign direct investment.
In launching the African Continental Free Trade Area and making it work, Africa is overcoming the historic fragmentation and isolation of her economies by opening up huge commercial opportunities as well as improving transport and communication linkages among the countries. This connectivity will enable the vision of the African Union and Agenda 2063: “An integrated, prosperous, and peaceful Africa, driven by its citizens, representing a dynamic force in the global arena.” However, there are many roadblocks for AU to overcome in the process of successful implementation of the agreement and realising her dream of “Agenda 2063: The Africa We Want [Pan-Africanism]’’. The success of the agreement depends on how well AU manages the disputes among member nations and oversees the implementation of the agreement in true spirit.
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