africa free trade

On the first anniversary of the African Continental Free Trade Area, it is important to assess progress made and challenges to still overcome.  

Among the New Year’s Day celebrations held across Africa, it is unlikely that too many people will have raised a glass to celebrate the first birthday of the African Continental Free Trade Area (AfCFTA). Officially launched on January 1, 2021, with the promise of creating the world’s largest free-trade area by number of participating countries, the AfCFTA’s benefits have yet to be felt by businesses and governments across the continent. 

Despite this, the project — designed to replicate the benefits of previous African regional free-trade areas, such as the East African Community and the Southern African Development Community, on a continent-wide basis — has recorded quiet but significant progress in its first year of operations. In addition to the operational rollout of a continent-wide payment and settlement system, significant agreements among nation states have been made on rules of origin.

Such agreements, in theory, pave the way for the trading of goods as part of AfCFTA from the start of 2022. 

However, the gains for African businesses and governments are years, if not decades, away from being realised. And while long-held dreams of greater African economic unity hold the prospect of lifting millions out of poverty, concerns about the practicalities of the project remain. 

Fewer barriers to continent-wide trading are unlikely to prove immediately appealing for countries and blocs with bilateral trading agreements. With the continent’s larger and more diversified economies set to be the immediate beneficiaries of lower African tariffs, smaller countries may well be reluctant to open their economies with the promise of adjustment revenues. And while the need for greater infrastructure spending to improve continental connectivity is a given, some have warned that investment in more basic development strategies should take priority in the shorter term. 

Historic aspirations

The AfCFTA was born out of a longstanding desire among African states for greater economic integration across the continent — something that long predates the departure of European colonial regimes in the mid-20th century. 

With regional free-trade areas across the continent proving the benefits of greater economic integration on a smaller scale, the creation of a continent-wide free-trade area was finally agreed in 2012 by leaders at the African Union’s summit in Addis Ababa, Ethiopia. 

After some initial delays, 44 out of 55 heads of state signed the agreement at a summit in Kigali, Rwanda, in March 2018. While a remarkable act of unity, euphoria was tempered somewhat by the absence of South Africa and Nigeria — the continent’s two largest economies. South Africa came on board four months later, with Nigeria finally signing in July 2019, after having overcome initial concerns about the impact of regional competition on its own goods and labour market. 

With Nigeria formally ratifying the AfCFTA on December 5, 2020, the African Union adopted the Johannesburg Declaration on the ‘Start of Trading Under the Agreement Establishing the African Continental Free Trade Area’, with trading officially starting on January 1, 2021, even while negotiations on rules of origin, tariff concessions and other commitments had yet to be finalised. 

“Today is a day we take Africa a step closer to a vision of an integrated continent — a vision of an integrated market on the African continent,” said Wamkele Mene, the secretary-general of the AfCFTA secretariat, in a speech on the first day of trading. 

“We have to take, as Africans, active steps to overcome the smallness of our respective national economies. We have to take active steps to overcome the lack of economies of scale. We have to take active steps to make sure that we place Africa on the path of industrial development so that, by the year 2035, we’re able to double intra-Africa trade with value-added goods.”

The genesis of the AfCFTA comes against a backdrop of low intra-continental trade levels in comparison with other world regions, caused by factors including multiple currencies, differences in customs and tariffs regimes, and significant deficiencies in basic physical and digital infrastructure. 

Intra-African exports made up just 16.6% of the continent’s total exports in 2017, the lowest of any world region apart from Oceania, according to Unctad data. And while experts stress that Africa’s comparatively low figure is heavily distorted by commodity exports from countries such as Nigeria, Botswana, the Democratic Republic of Congo and Angola, observers are united in calling for increased coordination across the continent in terms of regulations, tariffs and basic infrastructure. 

“There’s been some growth in local trade in recent years, but there’s very little in the way of common regulatory frameworks and payment mechanisms beyond and between the regional blocs,” says Sunil Kaushal, regional CEO for Africa and the Middle East at Standard Chartered. “It’s going to be a long journey, but we think the new free-trade area will help usher in improvements in the basic trading infrastructure and will really become an engine of growth for intra-African trade.” 

High hopes

With intra-African trade still at low levels, the prospect of a continent-wide free-trade area is an appealing prospect, connecting 1.3 billion people across 55 countries with a combined gross domestic product (GDP) of around $3.4tn. 

The World Bank estimates that real income gains from full implementation of the AfCFTA agreement could increase by 7%, or nearly $450bn, by 2035, with trade facilitation measures that cut red tape and simplify customs procedures alone providing an increase of $292bn.

Such gains would be transformative in terms of reducing poverty across the continent, particularly within west Africa. The World Bank estimates that the gains accrued from the implementation of the AfCFTA could lift 30 million people out of extreme poverty and around 68 million people out of moderate poverty, with women benefiting more than men. 

While such predictions look good on paper, few are under any illusion that the process is dependent on a lot of work and a lot of political will over a long timeframe. Although only Eritrea has yet to sign the initial AfCFTA agreement, just over 40 of the 54 signatories have ratified the agreement at time of writing.

“People need to be realistic about the timeframe for the implementation, given that negotiations are still at a very early stage,” says Andrew Mold, chief of regional integration and the AfCFTA cluster at the UN Economic Commission for Africa.

“If you look at the EU, the Treaty of Rome was signed in 1957, the customs union of the European Economic Community came into force 11 years later, and the single market only came into effect in 1993. Under the current timeline, a continent-wide reduction of 97% of tariffs is only envisaged for 2034, and naturally there’s plenty of work to be done before we get to that point.” 

Milestones reached

While the tangible benefits of the free-trade area are not likely to be experienced on a mass scale for years to come, the project can still tick off a few key achievements from its first year. In September, the AfCFTA secretariat and the African Export-Import Bank (Afreximbank) announced the operational rollout of the Pan-African Payment and Settlement System — a payments infrastructure designed to enable instant, cross-border payments in local currencies between African markets. 

At time of writing, the AfCFTA secretariat was preparing to launch its Africa Trade Gateway digital platform, containing trade-related information, including country market data, rules of origin and customs procedures aimed at providing small and medium-sized enterprises (SMEs) in particular with the tools to take advantage of cross-border trading under the agreement. 

“We think that it’s very important that SMEs are enabled to benefit from this agreement by having the right tools for them to be able to trade, and so the Africa Trade Gateway is a very important tool for inclusion for SMEs as we roll out and implement the AfCFTA,” Mr Mene said during a webinar hosted by think tank Chatham House in late November. 

Perhaps most significant of all has been the progress made in negotiations on rules of origin to help determine the source of goods being exported — a vital part of any free-trade area.

“The AfCFTA is not going to be a customs union for the whole of Africa for many years to come,” says the UNEC’s Mr Mold. “Therefore it’s fundamentally important to get the rules of origin right.” 

South Africa’s president Cyril Ramaphosa told delegates at the Intra-African Trade Fair in Durban in November that rules of origin needed to be as strong as possible. “We need, as Africans, to resist the temptation to simply become transhipment centres, adding only limited industrial value in Africa,” he said. 

Hippolyte Fofack, Afreximbank’s chief economist, says that most tariff lines have been agreed upon and agreement could be reached on all goods by early 2022. “Once the hurdle of rules of origin …  has been crossed, trade can really begin as part of the AfCFTA,” he told The Banker. “Negotiators can then move on to phase-two discussions on key issues that will shape and accelerate the diversification of sources of growth to boost intra-African trade, including protocols on investment, competition policy and intellectual property rights.”

Mr Mene said in late November that rules of origin agreement had been reached on around 8000 goods, with automotives, sugar, textiles and fabric still under discussion. 

Bye-bye bilateralism

Even as the groundwork for the AfCFTA continues apace, persuading countries to fully commit to both the spirit and the letter of the agreement is likely to be challenging. 

Persuading African countries to approach trade deals with outside parties on a united basis, rather than as individual states or as part of regional economic blocs, is set to prove particularly difficult in the short term. For example, Kenya is currently pursuing a free-trade deal with the US, after agreeing an economic partnership agreement with the UK in March 2021. 

“I do hope at some point there will be less inclination for countries to seek out such bilateral deals because they will drive trade deflection and undermine the growth and development impact associated with increasing economies of scale under the AfCFTA,” says Mr Fofack.  

“One of the most important criteria for success for the AfCFTA is for the ability of the continent to speak with one voice. No one country can really bargain with a larger country like China, the EU or the UK, but together as a bloc they will prove to be a powerful force. In a sense, the AfCFTA bargaining power could become a defining factor for trade power if collective interests are consistently prioritised.”

Yet the immediate benefits brought by such bilateral agreements make them hard to shrug off in the short term for countries looking for boosts to revenue. 

“The ultimate ideal of the AfCFTA is for Africa to do development on its own terms, which is of course a laudable idea,” says Charlie Robertson, global chief economist at Renaissance Capital.

“The reality is that countries are going to benefit much more in the short term from selling to rich countries outside the continent. Morocco’s exports per capita are among the highest in Africa and most of them are going to Europe — those two facts are not unrelated.” 

Inequalities of outcomes

Another hesitancy among states signing up to AfCFTA concerns the advantageous position of the continent’s largest economies that are likely to be the primary beneficiaries of increases in intra-African trade.

Nigeria, South Africa and Egypt together represent around 50% of the continent’s entire GDP, and are therefore likely to benefit more from a flattening of tariffs. South Africa’s dominance, accounting for nearly a quarter of total infra-African trade in 2020, is of particular concern for some observers. 

“[South Africa] is the sixth-largest supplier of African imports, after China, India, France, the US and Germany, [and it] also dominates trade within the Southern African Customs Union,” said Teniola Tayo, a consultant with the Institute for Security Studies, in a paper published in June 2021.

“Trade benefits may be disproportionately attained by its economy, thus enriching its producers and government more than other countries in the region.”

As the AfCFTA begins to take shape, it is vitally important countries that will lose out by lowering tariffs are properly compensated, according to Mr Kaushal.  

“With any free-trade agreement, you need to have a mechanism that compensates those states that will lose out when tariffs are harmonised,” he says. “Revenue harmonisation is going to be important, together with financing mechanisms for the transfer of revenues. There is going to be a need for support from development finance to make sure that this becomes a reality from a fiscal and a revenue point of view.”

Mr Mene said in November that the AfCFTA was working on an adjustment fund, to be worth at least $1bn, and would work towards raising further funds with the assistance of commercial banks and development finance institutions. 

“We know that there are countries in Africa that will suffer short-term adjustments as they implement the agreement and as they reduce and eliminate tariffs,” he said during the Chatham House webinar. “This adjustment fund is a tool to enable those countries to cushion the shock.” 

The fund is set to be accessible from early 2022, he added. 

Recalibration investment

Such adjustment funds will need to be used by governments to recalibrate their economies to make maximum use of the opportunities that are offered up by the AfCFTA project. 

“Unless African economies really seize this opportunity — and invest and change the structure of their economies — they won’t be in a position to fully benefit from the AfCFTA,” says Mr Fofack. 

“It’s my hope that once the rules of origin are finalised, it will pave the way for aggressive policies from governments when it comes to industrialisation and infrastructure.” 

Speaking at the Financial Times’s Africa Summit in November, World Trade Organisation secretary general Ngozi Okonjo-Iweala stressed the need for infrastructure connecting countries to improve, to pave the way for effective supply chains across the continent.

“One of the ways we can have a smooth functioning of markets is to have borders that are very easy to cross, so that needs a lot of investment,” she said.

Ms Okonjo-Iweala said there was also a need for a resurgence in manufacturing in Africa following a period of long decline, in order to provide jobs for the continent’s growing youth population, which would harmonise well with the implementation of the AfCFTA. 

“My dream is that we can have — [in] pharmaceuticals for instance — an ecosystem of production on the continent, where some countries will make some inputs, others will make [more inputs], and others will finish the product.” 

Yet African states need to be extremely wise about their infrastructure spending priorities, with a return on investment on major projects likely to take years to materialise. 

“The concern I have is that infrastructure will be put in place in an attempt to stimulate trade that will ultimately prove unsuccessful,” says Mr Robertson. 

“Infrastructure spending around coastal centres of trade that drives export overseas is a tried and tested means of generating wealth. If we look at China and other major markets, it’s only much, much later that roads and railways are extended into more inland areas as a means of accessing cheaper labour.

“It wouldn’t work to do it the other way around — to build railways to poorer parts of Africa with extremely low incomes. Getting the basics right, such as improving literacy levels and providing access to reliable power sources, are far more cost-effective means of increasing development in the short and medium term.”


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