The African Continental Free Trade Area: A Catalyst for Development?

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Credit: The MV Liemba trading with locals on its way to Kigoma, Tanzania/Maximillian Köster
Credit: The MV Liemba trading with locals on its way to Kigoma, Tanzania/Maximillian Köster
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In July 2019 Nigeria finally signed the African Continental Free Trade Agreement, after it had pulled out days before the signing was due. Now that the African Continental Free Trade Area (AfCFTA) can offer access to the enormous Nigerian market, it has a stronger position to negotiate with other parts of the world. AfCFTA constitutes a new milestone in regional integration, being the largest trade pact since the establishment of the World Trade Organization (WTO). The agreement, signed by 54 African states, is a powerful commitment to regional integration among African countries.

So far, many African countries are still heavily reliant on rents from extractive exports and imports of food products as well as capital goods from outside the continent. In 2017 intra-African trade only accounted for around 16.7% of the total volume of African trade. By contrast, in Europe and Asia intra-regional trade was larger than 50%. Although some Regional Economic Communities (RECs) have reduced tariffs, the African market remains fragmented (UNECA and WTO, 2019).

AfCFTA aims at catalyzing industrial transformation and stimulating trade and investment to generate prosperity. It includes phasing out tariffs on 90% of the goods exchanged and eliminating non-tariff barriers (e.g. heterogeneous rules on product standards and licensing requirements). Moreover, it deals with trade in services, investment, competition policy and intellectual property rights (Abrego et al. 2019). AfCFTA is also expected to support the achievement of the Agenda 2063 “The Africa We Want” and contribute to the achievement of the 2030 Agenda for Sustainable Development.

It is therefore crucial to investigate the potential opportunities and challenges of the African Continental Free Trade from a development as well as political perspective.

Trade facilitation has a positive impact on social welfare in Africa

Empirical evidence from 40 African countries shows that trade facilitation between 2010 and 2015 has improved social welfare indicators like education, child mortality and the human development index (Sakyi et al. 2018). The implementation of the free trade area could thus be an opportunity to reduce income poverty as well as multidimensional poverty within African countries, at least for the initially more closed economies.

AfCFTA is predicted to generate employment and accelerate GDP growth

Based on a static computable general equilibrium model, Saygili et al. (2018) estimate potential long-term effects of AfCFTA for 27 African countries. The authors study one scenario with full tariff elimination and another scenario with one product category being excluded from the tariff elimination. In the first scenario with full elimination, GDP is predicted to increase by 0.97% and total employment is predicted to rise by 1.17%. Results for the second scenario indicate lower gains. Estimates of the employment effect by sub-sector indicate the largest growth rates for the manufacturing sector. The Continental Free Trade Area could thus reduce unemployment and contribute to economic welfare.

African continental free trade offers the opportunity to industrialize

Intra-African trade has a higher share of manufactured and value-added products and a lower share of primary commodities when compared with African trade with the rest of the world (Lungu 2019). Under full tariff elimination, intra-African trade could increase by 33% (Saygili et al. 2018). This growth is predicted to be most pronounced in the manufacturing sector, which to date has a low contribution to the African economy. The agreement therefore constitutes an opportunity to industrialize, which is a key policy priority for the continent.

Wealth gains are unlikely to be shared equally across countries

A major challenge of the Continental Free Trade Area are its distributional consequences. If wealth gains are not shared equally across as well as within countries, wealth inequalities may arise or even be intensified. Based on a general equilibrium trade model, Abrego et al. (2019) estimate welfare effects of AfCFTA for 45 African countries. Using data from trade flows, effective import tariffs and actual non-tariff barriers, they find a large dispersion in wealth gains across countries. They conclude, for example, that countries with initially strong trade ties to other African countries will benefit more from the trade agreement.

Vulnerable groups could be excluded from the new opportunities

For the agreement to translate into sustainable development, it needs to translate into inclusive growth within countries. One priority in this regard is that structural transformation leads to job creation, which require skills beyond the primary school level. It is thus important to empower women and young people such that they can benefit from the new opportunities. Although, driven by necessity, many women are self-employed and only a minority engage in exporting, which means that they might be excluded from potential wealth gains (UNECA and WTO 2019). If these barriers are not addressed, the free trade area will potentially intensify inequalities within countries.

Will AfCFTA be a win-win for all countries?

One of the major challenges for AfCFTA is the harmonization of heterogeneous economies under one agreement. African countries widely vary in their levels of development and intra-African trade is dominated by countries like Côte d’Ivoire, Kenya, Nigeria and South Africa. There is therefore a pressing concern that unfair regulations and mechanisms that leave out weaker economies could be set up under the agreement. This is particularly important for the 32 least developed countries (LDCs) involved (Bello and Gass 2018). Regulations on the special and differential treatment of LDCs are aiming to address these concerns, however more measures could be implemented to ensure an inclusive approach.

Policy Recommendations

So far, only estimations about potential benefits and risks of the African Continental Free Trade Area can be made, as the implementation phase will only start in July 2020. Policy makers and aid practitioners have the chance to actively support the implementation in order to achieve the full development potential of the agreement in an inclusive way.

The evidence we have so far on the basis of models, simulations and the literature suggest five key recommendations:

  1. African governments should work with aid practitioners and international institutions to address distributional effects of the trade agreement and promote inclusive trade growth that is consistent with the SDGs.
  2. Government policy should specifically target vulnerable groups like women and young people in order to ensure an inclusive implementation of the trade agreement. The focus should be on training programs to ensure a smooth reallocation of labor to sectors that are more likely to grow.
  3. Policy makers should consider safety nets for those countries that will be negatively affected by the regulatory changes and should take the specific context into account.
  4. Donors and international organizations should work in partnership with African countries to build the capacity to exploit the full potential of AfCFTA. Moreover, they could support national implementation regarding overlapping RECs.
  5. African governments and civil society groups – supported by international allies – should monitor the impact of the African Continental Free Trade and set clear goals and targets, with focus on economic and social rights.

 

Julia Schäfer is a Master’s student in Development Economics at the University of Göttingen, Germany with research interests in global health, rural development and inequality.

 

 

Publication bibliography

Abrego, L.; Amado, M. A.; Gursoy, T.; Nicholls, G.; Perez-Saiz, H. (2019): The African Continental Free Trade Agreement: Welfare Gains Estimates from a General Equilibrium Model. IMF Working Paper. WP/19/124.

Bello, A. S.; Gass, Jonny (2018): Who are the winners and losers of Africa’s new free trade agreement? Atlantic Council blog. Available: https://www.atlanticcouncil.org/blogs/africasource/who-are-the-winners-and-losers-of-africa-s-new-free-trade-agreement/ [accessed 23 March 2020].

Lungu, I. (2019): African African (De) Industrialisation and the AfCFTA. Discussion Paper. GIZ.

Sakyi, D.; Bonuedi, I.; Opoku, E. (2018): Trade facilitation and social welfare in Africa. In Journal of African Trade 5 (1-2), pp. 35–53.

Saygili, M.; Peters, R.; Knebel, C. (2018): African Continental Free Trade Area: Challenges and Opportunities of Tariff Reductions. In UNCTAD Research Paper No. 15.

UNECA; WTO (2019): An Inclusive Continental Free Trade Area. Aid For Trade and the Empowerment of Women and Young People.

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