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AFRICA -THE WORLD'S LARGEST FREE-TRADE AREA
Pictured above: Dr. Albert Zeufack, Chief Economist for Africa, the World Bank - Photo by The World Bank
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Will Trade Agreement Deliver New Economic Dawn for Africa?
Africa’s journey to market integration began in earnest with the commencement of trading under the African Continental Free Trade Area (AfCFTA) – the world’s largest free-trade area – on January 1, 2021, creating a market of 1.2 billion people and the eighth economic bloc in the world with a $3-trillion combined GDP, that is expected to more than double by 2050. The creation of an “African Common Market” has been a major regional goal for decades, since the Lagos Plan of Action of 1980. Now, the continent is emerging as a surprising leader in advancing rules-based trade—and its success is highlighting how developing countries could play a key role in shaping a 21st century trade agenda.
“The African Continental Free Trade Area has the potential to increase employment opportunities and incomes, helping to expand opportunities for all Africans,” said Albert Zeufack, the World Bank’s Chief Economist for Africa. “The AfCFTA is expected to lift around 68 million people out of moderate poverty and make African countries more competitive. But successful implementation will be key, including careful monitoring of impacts on all workers –women and men, skilled and unskilled—across all countries and sectors, ensuring the agreement’s full benefit.” a major opportunity for countries to boost growth, reduce poverty, and broaden economic inclusion. If implemented fully, the trade pact could boost regional income by 7% or $450 billion, speed up wage growth for women, and lift 30 million people out of extreme poverty by 2035.
The World Bank’s report suggests that achieving these gains will be particularly important given the economic damage caused by the COVID-19 (coronavirus) pandemic, which was estimated to cause up to $79 billion in output losses in Africa in 2020. The pandemic has caused major disruptions to trade across the continent, including in critical goods such as medical supplies and food. Because of the pandemic, Africa is expected to suffer its first outright recession in 25 years as output shrinks by as much as 5.1 percent this year.
Successful implementation of AfCFTA would help cushion the negative effects of COVID-19 on economic growth by supporting regional trade and value chains through the reduction of trade costs. In the longer term, AfCFTA would provide a path for integration and growth-enhancing reforms for African countries. By replacing the patchwork of regional agreements, streamlining border procedures, and prioritizing trade reforms, AfCFTA could help African countries increase their resiliency in the face of future economic shocks.
According to the report, the agreement would reshape markets and economies across the region, leading to the creation of new industries and the expansion of key sectors. Overall economic gains would vary, with the largest gains going to countries that currently have high trade costs. Côte d’Ivoire and Zimbabwe—where trade costs are among the region’s highest—would see the biggest gains, with each increasing income by 14 percent. AfCFTA would also significantly boost African trade, particularly intraregional trade in manufacturing. Intra-continental exports would increase by 81 percent while the increase to non-African countries would be 19 percent.
Throughout much of the 20th century, Africa lagged behind other regions in global integration. Its tariffs remained high and trading patterns have—for many countries—remained unchanged from the colonial era. But things have shifted recently. A variety of countries in Africa at all levels of development—such as Morocco, Ethiopia, and Mauritius—have begun integrating into global value chains, accompanied by foreign direct investment and rising productivity.
Andrew Alli, a former president and CEO of the Africa Finance Corporation
These gains would flow largely to the most vulnerable citizens. Successful implementation of AfCFTA would lift an estimated 30 million Africans out of extreme poverty and boost the incomes of nearly 68 million others who live on less than $5.50 a day. Wages would rise, with women seeing increases of 10.5 percent and men by 9.9 percent by 2035. It would also boost wages for skilled and unskilled workers alike—10.3 percent for unskilled workers, and 9.8 percent for skilled workers.
These gains largely reflect AfCFTA’s emphasis on lowering trade costs. Decreasing tariffs, reducing nontariff barriers, and improving hard and soft infrastructure at the borders will reduce red tape, lower compliance costs for traders, thereby boosting intracontinental trade and ultimately make it easier for African businesses to integrate into global supply chains.
But getting there will not be easy. Many countries will face substantial political pressure to protect uncompetitive domestic industries that stand to lose from foreign competition. Research shows that policymakers that are able to resist short-term political fixes stand to gain the most through increased productivity gains. While the overall net effects will be positive, AfCFTA’s implementation will result in job losses in sectors where countries are less competitive—and governments will need to be ready to support workers with adequate safety nets and policies to retrain them.
Much work remains to be done and Africa’s envisioned free trade area still faces many hurdles. Nigeria, for instance, just reopened four of its land borders to trade in December 2020, more than a year after closing them to try to reduce smuggling, dampen the illegal inflow of small arms and drugs, and protect local manufacturers. But Nigeria still prohibits up to 26 goods from being imported into the country, and its Central Bank has also denied foreign exchange at official market rates to importers of more than 40 other goods. Regardless of the free trade agreement, experts maintain that Nigeria’s trade policies have only grown more restrictive.
Nigeria isn’t alone. Intra-African trade is notoriously low, amounting to only around 15 percent of the continent’s total goods trade as of 2016. In West Africa, trade relations between Gambia and Senegal are just beginning to officially open up after the construction of the 1.2-mile Senegambia Bridge. In East Africa, meanwhile, tensions still mar trade relations between Eritrea and Ethiopia. Inadequate trade-related infrastructure, lack of financial access, restrictive customs procedures, and extensive political uncertainty all play a role. And add to that protectionism among some African countries seeking to decrease their dependence on imports and promote local manufacturing, as is the case with Nigeria, among others.
As a result of these trade barriers, Andrew Alli, a former president and CEO of the Africa Finance Corporation, said he doesn’t expect true free trade in Africa anytime soon: “I think it’s going to take a long time, unfortunately, for these trade barriers to fall and for trade frictions to reduce. But you’ve got to start somewhere, and the AfCFTA provides a framework and a road map for that to happen.”
Nigerian President Muhammadu Buhari is shown arriving to Niamey, Niger Republic, ahead of the 12th Extraordinary Session of the Assembly of African Union Heads of State and Government on July 6, 2019, where he signed the AfCFTA agreement. President Buhari was criticized for waiting a year before signing the agreement. President Buhari said he was waiting for the results of a detailed study on how the agreement will impact the Nigeria.
The African Continental Free Trade Agreement (AfCFTA) is a trade agreement between African Union (AU) member states with the goal of creating a single market followed by free movement and a single-currency union. The agreement was brokered by the AU and signed on by 44 of its 55 member states at the African Union summit in Kigali, Rwanda on March 21, 2018.
It is these long-standing frictions to economic cooperation among African countries that the AfCFTA seeks to solve. And, if all goes well, it should. Despite some criticism, “we have to remember that [the agreement] is part of African Union 2063,” Andrew S. Nevin, chief economist at PwC Nigeria, said in January. That is, “it’s a 50-year vision for Africa, and it’s step by step by step.” Trade barriers in Africa, whether political or cultural, will only be removed gradually.
In fact, UNECA (United Nations Economic Commission for Africa) argues, the agreement is Africa’s only path to sustainable development. Alli explained that “people are looking to invest in where they see there’s a market for what they are investing in, whether that is in infrastructure, manufacturing goods for local consumption, or other things.” If you have “a fragmented market like Africa is today, it discourages investment.”
AfCFTA Secretary General Wamkele Mene: “Market integration is not an event but a process that takes time.”
AfCFTA Secretary General Wamkele Mene said, “The most important point that I want to emphasize is that Africa is now trading under new rules, new preferences, because we want to build a single integrated market on the African continent. It may take some time before each of us sees the direct benefit. We are not going to be deterred by our critics who say they don’t see evidence that trading has actually started.”
Speaking during a virtual press conference on January 12, 2021, Mene dismissed talks that the AfCFTA arrangement was being rushed, saying there’s no trade agreement where all members were ready at the same time. Countries like Ghana, Egypt and South Africa were in fact prepared with the required customs infrastructure to ensure commercially meaningful trading started, he said, adding Ghana had on January 4, 2021, officially recognized the first consignment of goods to be exported under the AfCFTA, an event other countries would be replicating soon to mark the milestone.
According to Mene, market integration is not an event but a process that takes time, pointing out that it took the European Union almost 60 years to achieve its current depth of integration.
“Africa’s market integration would take some time but you have to start somewhere,” he said.
Only Eritrea out of the continent’s 55 countries is yet to sign the agreement which has already been ratified by 34 member states. Through its African Trade Policy Center (ATPC), UNECA has been working with the African Union Commission (AUC) and member states to deepen Africa’s trade integration and effectively implement the agreement through policy advocacy and national strategy development. UNECA also works with the International Trade Centre (ITC), United Nations Conference on Trade and Development (UNCTAD), and independent trade experts with the financial support of the European Union to support the implementation of the AfCFTA across the continent.
It remains to be seen whether the AfCFTA will actually end arbitrary border closures and trade frictions that have dogged African countries over the years. If it does, it could mean a new economic dawn for the continent.
Africa’s actions so far show that it is up to the task, and AfCFTA is laying the foundation for it to reap the benefits of integration into the global economy.
