Understanding the African Continental Free Trade Area (AfCFTA)
“Nigeria is signing the #AfCFTA Agreement after extensive domestic consultations, and is focused on taking advantage of ongoing negotiations to secure the necessary safeguards against smuggling, dumping and other risks/threats.”
This was a post of the Nigerian presidency handle on the Twitter platform yesterday. The announcement was a relief for many stakeholders who have been working hard to make the African Continental Free Trade Area (AfCFTA), a reality. Nigeria, the biggest economy in Africa and the biggest market with about 200 million people, was until this announcement, reluctant on signing the agreement.
Two other countries, Benin and Eritrea, have also refused to sign the trade agreement. They were the only three countries that have yet to sign the AfCFTA which went into effect on May 30th of this year after 22 countries have deposited their instruments of ratification. For now, only 24 countries have ratified the agreement.
But what’s the AfCFTA?
The AfCFTA is a continental free trade area which currently includes 52 of the 55 members of the African Union (AU). The purpose of the agreement is to establish a single market in Africa which allows for the free movement of goods and eventually people and investments across the continent. The agreement officially went into effect on May 30th 2019. According to the AU, the AfCFTA is the largest free trade area since the creation of the World Trade Organization in 1995¹.
The benefits for participating countries
The AfCFTA will constitute a single market of 1.2 billion people and a GDP of over $2.5 trillion. The agreement is expected to boost intra-African trade which currently stands at an abysmal 15%. This rate is very low when compared to intra-trade in Europe (67%) and Asia (58%). One way in which it promises to boost trade among African countries is by gradually eliminating almost all tariffs and barriers. The agreement requires all members to eliminate tariffs on 90% of their tariff lines².
Currently, businesses face higher tariffs when they export within Africa than when they export outside the continent. With the AfCFTA, tariffs will be reduced and eventually eliminated, encouraging businesses to further export within the continent. This is important because by 2050, the continent is projected to have a population of 2.5 billion people. Companies will find it much more interesting and profitable to provide goods and services to a big single market. According to the African Export–Import Bank, under the AfCFTA intra-African trade will increase by 52.3% by 2022³.
It could fastrack the industrialization of Africa
The AfCFTA also promises to also accelerate the industrialization of the continent by creating regional value chains for manufacturing and industrial-scale production. This will also have a positive impact for SMEs which still account for 80% of Africa’s businesses. A small business will find it much easier to expand into other countries in its region whereas before, most of them were limited to a single country. With the agreement, eventually the SMEs will be able to export to other regions of the continent and possibly overseas.
Finally, if the manufacturing sector grows on the continent, an immediate benefit is an increase in employment due to the labor-intensive factories that will be opened. Presently, many of the biggest firms on the continent operate in the extractive industry, which is capital-intensive and therefore, the employment opportunities are not proportionate to the revenues that the firms make. The continental agreement could significantly reduce the unemployment rate in Africa.
There are some concerns about the AfCFTA
Some policy makers, business leaders, and analysts have expressed some concerns about the agreement. One of the concerns about the AfCFTA is that foreign companies, especially the multinationals, can use it as a trojan horse to further penetrate the African market. A simple example to illustrate this: a European firm could export powder milk to the Republic of Benin. Using a subsidiary in Benin, the company could then export it to Nigeria without paying tariffs. This would present an unfair competition to local manufacturers who would have been otherwise protected by tariffs and other non-tariff barriers.
Furthermore, implementing the agreement will be complex given the large number of countries participating and the diversity of their economies. Some countries for example, depend on fiscal revenues at the border and eliminating tariffs will constitute a considerable loss of revenues for them. As a result, the implementation of the AfCFTA must be aligned in ways that enable losses to be replaced by gains.
In this video, Nigerian industrialist Abdulsamad Rabiu, succinctly explains a couple of his concerns about the continental trade agreement. His explanation outlines the reservations that most Nigerians have about the AfCFTA.
Will it work?
Although concerns about the AfCFTA are legitimate and some ambiguities have yet to be resolved, it sounds promising enough for stakeholders to pursue its implementation. It’s however, the responsibility of policy makers and civil society players to ensure that there are clauses in the agreement that address the reasonable concerns that people have.
So far, there are some provisions in the agreement that have helped to abate people’s apprehension about the deal. The rules of origination for example, will help to prevent transshipment which is a method through which firms from non-preferential countries can dump their products into AfCFTA zone by taking advantage of the zero tariffs.
Still, details have not yet been provided on how the rules of origination will be determined at the continental-level. The AU also has yet to decide on the criteria for designating products as sensitive or excluded (the 10% of goods that will remain subject to tariffs).
Execution of AfCFTA mandate will phase in through bilateral negotiations
The implementation phase will be gradual and will take time because it will be conducted bilaterally. In other words, countries will have to negotiate with each other, product by product while respecting the overall mandate of the AU. Furthermore, there are numerous regional economic zones in Africa, so stakeholders will need to collaborate to harmonize regulations.
Tomorrow, heads of states will convene in Niamey for a four-day AU summit to launch the Operational Phase of the AfCFTA. The civil society will also hold a forum in the goal of enhancing stakeholder engagement on the implementation of the trade agreement. It’s expected that announcements will be made to provide more details concerning some of the ambiguities that have not been addressed regarding the historical trade agreement.
