27 Jan African Continental Free Trade Area (AfCFTA) and its impact on African development

After an unprecedented and challenging 2020, the new year gives rise to great prospects of a better tomorrow. While the pandemic is still active, with most countries in lockdown, the hopes of a vaccine signal hopes of a better year. The new year brings great anticipation of new economic growth prospects through enhanced trade and development. The African Continental Free Trade Area was founded in 2018 and officially launched on the 1^st of January 2021. According to the South African President, Cyril Ramaphosa, the AfCFTA is the start of a new era of trade between African countries and will fundamentally change the economic fortunes of our continent. With the potential to benefit over 1.2 billion people in Africa, the AfCFTA’s growth and economic benefits are set to take off in all sectors from agriculture, manufacturing, banking and finance, economics, trade and logistics and much more. The 2.5 percent worth of GDP growth and the single market for trading goods is set to provide tremendous opportunities and partnerships to entrepreneurs, consumers and the private sector. It will also focus on the inclusivity of women and small businesses and benefit consumers through the movement of goods and services which will be facilitated through deepening economic integration.

There has been limited intra-African trade in the past among the 55 nation states due to conflict and warfare in nations such as DRC, Mali, Sudan, Eritrea and Ethiopia. Many states have had to depend on foreign markets for goods and services. Trade within the continent is below 3% and exports are currently dominated by natural resources and commodities, which is illustrated in the image below. However, the AfCFTA is widely expected to sustainably transform this and boost all platforms of growth and trade.

(Tralac, 2020)

Benefits of the AfCFTA to the industrialisation agenda

Manufacturing across the continent has been declining for the past 30 years. With a legacy of mass Economic Structural Adjustment Programmes, many countries continue to struggle with the massive scale of unemployment. Consequently, African countries have made the industrialisation agenda the backbone of their economic development growth strategies. The AfCFTA has the potential to boost agricultural development, promote agro-processing and ensure food security. This will alleviate poverty and create a blueprint for the effective achievement of the 2030 Agenda SDGs and Agenda 2063. The increase in manufacturing will also increase employment opportunities due to the labour-intensive nature of the sector. This has the potential to create a substantial tax base to boost government revenues.

The promotion of trade and regional integration will create opportunities for the active participation of SME’s who form 80% of enterprises on the continent – all inevitably boosting employment creation. The removal of non-tariff barriers and harmonisation of standards across borders will also create a base for intensive entrepreneurship activities in trade related sectors such as branding, marketing, logistics, transportation and distribution and have a positive impact on inclusive socio-economic development.

However, the success of the AfCFTA  rests significantly  in the hands of the policy makers.  In order to avoid minimal gains in the trade agreement, governments have critical issues to overcome particularly in their industrialisation strategies.

Potential challenges

Trade and industrialisation play a vital role in economic growth, however the increasing competitive nature of manufacturing and trade hinder Africa’s performance. With only a few African countries making significant advancements in trade, intra-African trade is limited to 15% of Africa’s total trade while the African share of global trade stands at only 3%. This is due to low levels of investment in industrialisation, poor trade strategies and trade-related infrastructure and a lack of policy coordination between African countries. The success of intra-African trade is also reliant on the uptake of the manufacturing sector across the continent. There is a demand for the manufacturing of products that are globally competitive, show diversification and representation on the export market and have strong linkages between production and consumption.

Another challenge, , is Africa’s heavy resilience on global value chains and underdeveloped regional value chains. Strong forward and backward regional linkages need to be developed for the successful implementation of the AfCFTA’s trade policies. Other potential challenges include Africa’s limited human capacity, investment and technological uptake. Many African countries lack Science, Technology, Engineering and Mathematics related programmes beyond secondary level which limit the skills and expertise available in these countries. The limited investment in innovative technology and human capacity hinders the continent’s economic prosperity and sustainable development.

AfCFTA’s success is also reliant on the member states’ engagement and cooperation, as well as public private partnerships. The member states include 54 out of Africa’s 55 countries as Eritrea is the only country that has not signed the agreement and is illustrated below.

(Sahel and West Africa Club Secretariat (SWAC/OECD), 2019)

Recommendations

The AfCFTA provides opportunities for inclusive growth, diversification and structural transformation. This will be attainable through policy frameworks that are member state-specific that are in accordance to their comparative advantage, digital and trade infrastructure, manufacturing capacity and economic structure. These frameworks will also require conscientious gender-responsive initiatives that foster an inclusive environment in the economic and trade system. Investments should also be directed towards developing a digital trade sector as e-commerce platforms and connectivity are key to inclusivity in Africa. Another key factor in the AfCFTA’s implementation is the framework regarding the Rules of Origin. The Rules of Origin should be harmonised across states and simple to understand, follow and enforce. If the Rules of Origin standards and certification are not transparent, it may discourage member states to trade and hinder the development of regional value chains. The Rules of Origin and other trade protocols are illustrated below. The timeline of these protocols should be adhered to for the successful implementation and completion of phase I and phase II.

(Tralac, 2019)

References

Sahel and West Africa Club Secretariat (SWAC/OECD), 2019. The African Continental Free Trade Area (AfCFTA). [Online]
Available at: http://www.west-africa-brief.org/content/en/african-continental-free-trade-area-afcfta

Tralac, 2019. Frequently Asked Questions about the African Continental Free Trade Area (AfCFTA). [Online]
Available at: https://www.tralac.org/documents/resources/faqs/3079-african-continental-free-trade-area-faqs-december-2019-update/file.html

Tralac, 2020. African Continental Free Trade Area (AfCFTA) Legal Texts and Policy Documents. [Online]
Available at: https://www.tralac.org/resources/by-region/cfta.html