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Will the African Continental Free Trade Area unlock opportunities for African business?

The immense promise, and challenges, of implementing the AfCFTA agreement

 

afcfta
Image: Further Africa

The African Continental Free Trade Area (AfCFTA) has been lauded as a significant step towards advancing Africa’s economic growth and prosperity. It holds huge promise for the continent to realise its economic potential and shared growth aspirations. However, this will depend largely on the implementation of the agreement through the commitment and cooperation of all member states to its vision and stated objectives. The possible wins for the continent seem obvious, but AfCFTA is a bold initiative that faces both large opportunities and challenges.

 

AfCFTA origins

The launch of the AfCFTA in July 2019 represented a new dawn for the continent and its people. The occasion was the 12th Extraordinary Summit of the African Union (AU) in Niamey. For all intents and purposes, the AfCFTA is an ambitious project which seeks to radically transform Africa’s manufacturing and trade environment, and elevate its standing on the global trade rankings by enhancing intra-Africa trade. It is a key initiative of the AU’s developmental framework Agenda 2063, aptly titled: The Africa We Want. Its main objective, amongst others, is to foster and expedite trade among and between African member states by removing trade restrictions.

Negotiations for the AfCFTA agreement were facilitated by the AU and concluded with the signing of the agreement in March 2018 by 44 of the 55 AU member states in Kigali, Rwanda. Countries could only trade under the AfCFTA agreement from 1 January 2021.  The free trade area under AfCFTA covers the greater part of the African continent, with eight Regional Economic Communities coming together to establish a single market for the African continent. As such, it is the most wide-reaching by population size and by the number of member states, extending to over 1.3 billion people in the African continent, which is also the second-biggest continent in the world after Asia.

The African continent lags behind in trade and exports compared to other continents, despite its abundance of natural resources and minerals. For a long time, it was reduced to being a recipient of grant funding and loans from international donors and funding institutions. With the establishment of this continental trade agreement, the AU and its member states showed strong intentions to boost trade between African countries and lift of poverty, underdevelopment, and economic stagnation. With many African economies still recovering from the devastating effects of the Covid-19 pandemic, which severely affected many emerging and developing economies, the AfCFTA agreement could bring a welcome trade injection to stimulate these economies.

The implementation of the AfCFTA will result in the reduction, and ultimately the removal, of tariffs amongst member states and help to standardise regulatory aspects pertaining to quality and sanitary standards. Ensuring uniformity of regulatory and other technical standards will enable an easier flow of trade between member countries. Currently, regulatory and policy measures are structured according to the regional trading blocs and in some instances, they are completely absent, which inhibits trade amongst African countries.

 

The promise of free trade

According to the World Bank, the implementation of AfCFTA is expected to produce a continental economic zone valued at around USD3.4 trillion. By simplifying trade regimes, it would facilitate USD292 billion of the USD450 billion in prospective revenue. A report by the South African Institute of International Affairs predicts that when tariffs are lifted, along with the elimination of non-tariff barriers (NTBs) and trade promotion, GDP for the continent could grow by 7%. Effectively, this would translate into approximately 30 million people being elevated out of extreme poverty, while around 68 million impoverished people will have their income levels increased by approximately 10% by the year 2035. The boosting of trade could result in additional exports from Africa increasing by 29% by 2035, while trade exports between African states are estimated to grow by 81%.

Labour-absorbing sectors are what African countries need to create jobs and grow their economies. Across the African continent, the AfCFTA could give a much needed boost to key sectors like agriculture and enhance efforts to revitalise agro-processing and light manufacturing sectors such as wood, leather, textile, and garment products. Revitalising and fostering the growth of light manufacturing could help create millions of jobs for Africa’s burgeoning youth population and women. According to some analysts, this could make Africa the next global manufacturing hub. This could have a ripple effect on other sectors of the economy, and help to create new industries.

 

New barriers to trade

But the realities of implementation also poses challenges. Countries have different priorities, which will shape their commitment to the AfCFTA objectives. Removing the tariff and non-tariff barriers will require financial resources for key activities such as re-training customs and excise staff, and updating systems. There are already delays in negotiations and the finalisation of the different phases of the protocols which guide implementation. For instance, negotiations for Phase II, which were scheduled to be finalised by the end of 2022, had not even been concluded by 2023. This delays the start of negotiations for the next phase and casts doubt about how achievable it will be to reach the ambitious target of removing tariffs on 97% of goods by 2034.

Africa is also highly fragmented, both geographically and politically. There can be a lack of trust amongst African countries which dates back to their colonial past and beyond, with countries identifying closely with certain groupings. In addition, although the regional economic blocs serve an important role in facilitating regional trade, they may have overlapping or conflicting regulations which might interfere with the continental integration process, unless they are addressed adequately. Another priority for African countries to address is the lack of infrastructure for trade, including proper ports, roads, and telecommunications networks. This infrastructure cannot be achieved overnight and will require leadership and political will to build.

 

AfCFTA and South Africa

In the case of South Africa, companies could benefit more from the AfCFTA given South Africa’s comparative advantages in manufacturing. Compared to most economies on the continent, South Africa has a more advanced economy and is already exporting products to a number of countries in the continent. Prior to the AfCFTA agreement, almost 90% of South Africa’s trade went to SADC countries and Nigeria. As of 2018, South Africa’s total trade with African countries mainly included Namibia (12%), Mozambique (12%), Botswana (13%), and Nigeria (12%). It will be interesting to see how these trade statistics change with the implementation of the agreement. The Department of Trade, Industry and Competition (DTIC) has identified the auto-manufacturing and auto-components sectors as one of the major sectors that will promote the AfCFTA. However, the opportunities for South African companies seem plentiful given that 4500 products have been highlighted for trade under the AfCFTA. However, South Africa will need to address challenges of productivity, stable energy supply, and in some instances, ageing infrastructure and inefficiencies that make it difficult for South African companies to capitalise on the opportunities presented by AfCFTA.

The AfCFTA holds immense promise for the economic prosperity of the continent. But its potential can only be realised if all the member states fully commit to the goals and objectives of this agreement and are prepared to address the many stumbling blocks of implementation.

 

by Luvuyo Mncanca

 

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