We concluded our last blog post, Investing in Africa – Considerations for Diasporans, with a mention of the African Continental Free Trade Agreement (AfCFTA), a regional trade deal signed by African countries. We said that foreign investors will benefit from the integrated markets and lower tariffs which are objectives of AfCFTA. Today, we take a closer look at the agreement – its origins, challenges and potential.
Intra-African trade among African countries remains the lowest of any world region. Intra-African trade was 15.3% of total African trade in 2015. To offer comparison, trade among developing countries in Eastern Asia as a share of total Eastern Asian trade was 32.1%. Intra-African exports were 16.6% of total exports in 2017, compared with 68% in Europe and 59% in Asia. Many factors are responsible for these low numbers. For instance, at an average of 19%, African tariffs are much higher than the 12% average for the rest of the world.
Also, a few countries and a few products dominate intra-African trade. The World Bank reports that five countries (Côte d’Ivoire, Ghana, Kenya, Nigeria and Zimbabwe) in Sub-Saharan African provide 75% of all intra-African exports. Petroleum alone accounts for more than 30 percent of this exchange, while cotton, live animals, maize and cocoa combine for a further 18 percent. Promoting industrialization and trade are therefore the main objectives of the African Continental Free Trade Area (AfCFTA).
The AfCFTA agreement was signed in Kigali, Rwanda, on 21st March 2018 and came into force on 30th May 2019. Phase 1 covers the liberalization of trade in goods and services. Phase 2 covers protocols for cooperation on competition, intellectual property and investment.
The treaty instructs state parties to treat products imported from other state parties the same way they would treat domestic products. State parties are to gradually eliminate import duties and charges. Concerning services, state parties are also to eliminate measures that restrict foreign (as in, African) service transactions, employment of Africans and participation of African businesses within their jurisdiction.
The AfCFTA aims to create a Continental Free Trade Area (CFTA) for goods and services in Africa. It is expected to liberalise and facilitate the free movement of people, investments and businesses across the continent. The agreement is an important milestone for promoting intra-African trade (currently at 16 to 17 percent) by more than 52 per cent.
However, for AfCFTA to achieve its full potential, policy reforms and trade facilitation measures have to be put in place.
AfCFTA can only work if Africa avoids the implementation gap. The record of African countries with REC (Regional Economic Community) agreements is poor. Nonconformity has impeded trade growth and “undermined the transformative potential of intra-regional trade”.
Furthermore, many African countries still lack industrial capability. Meanwhile, to maximize the opportunities created by the AfCFTA, African countries must improve their ability to match the demand of the AfCFTA market. They need to implement effective industrial policies that will drive domestic industrialization.
Speaking about industrial policies, the national policies of many African countries often conflict with the goals of regional trade integration. And when this conflict happens, they tend to prioritise their national objectives. A good example is the closure of the Nigeria-Benin border. Nigeria claims that smuggling undermines its industrialisation efforts, and it may be right. Yet, the closure contravenes its commitments under the Economic Community of West African States (ECOWAS). While the AfCFTA agreement is admirable on paper, countries must commit to its effect and superiority.
Finally, in many African countries, the lack of credible macroeconomic policies keeps industry away. Policies change too frequently and so “businessmen do not know, from one day to the other, one week to the other or one month to the other, exactly what is going to happen”. Respect for the rule of law as well as clear, consistent and predictable macro-economic policies are prerequisites for a suitable business environment.
Significantly, the potential of AfCFTA has been largely undermined by the COVID-19 pandemic. Its mission – the integration of African economies – has become implausible in light of border closure, travel bans and other containment measures enforced by African countries. Trading under the AfCFTA, which was due to commence on 1 July 2020, has now been postponed to 1 January 2021.
Yet, AfCFTA is the largest trade agreement since the creation of the World Trade Organisation (WTO) in 1994. It promises to create a continental trade bloc of 1.3 billion people and a combined GDP of $3.4 trillion. It has the potential to lift 30 million people out of extreme poverty. Also, it aims to attract $4 trillion in investments and consumer spending. This is where foreign investors come in. Indeed, AfCFTA introduces unprecedented opportunities. Volition Blue is fostering strategic and genuine cross-border collaborations. We give foreign investors access to vetted deal flows and investment opportunities.