Trade is a powerful engine for economic growth and development. However, Africa’s story in this regard has been different as compared to other regions of the world such as East Asia, where trade is believed to have been particularly instrumental in the development of that region and has had an enormous impact on poverty levels through its effect on economic growth, employment, consumer prices and government revenues and spending.
So far, Africa’s traditional role in the global trade market has generally been to provide raw commodities in exchange for manufactured goods, thereby capturing a dismal 3% of the global share of trade.
Fostering intra-African trade and unifying the continental market therefore is imperative, especially given that Africa’s trade with itself on average over the past decade, is no more than 15%.
This does not compare well with other regions of the world, such as Europe where 63% of Western European trade takes place with other European nations, or North American countries where 63% of their trade takes place among themselves. The implications of low shares of trade both at the continental and global level have been far reaching for Africa’s growth and development where trade patterns have continued to be influenced by historical links both within and with the rest of the world.
Cue the 21st March 2018 when African Heads of State and Government in their 10th Extraordinary Summit in Kigali signed the Agreement Establishing the African Continental Free Trade Area (AfCFTA).
The AfCFTA Agreement includes 3 Protocols: A Protocol on Trade in Goods (with associated Annexes), a Protocol on Trade in Services and a Protocol on Rules and Procedures on the Settlement of Disputes. This package of legal texts form the substance of Phase 1 of the negotiations launched by the AU Assembly back in 2015. Phase 2 of the negotiations will cover competition policy, intellectual property rights and investment and will start in late 2018.
The AfCFTA is one of the flagship projects of the African Union’s Agenda 2063: “The Africa We Want”. When the AfCFTA comes into force, upon the deposit of the 22nd instrument of ratification, it will cover a market of 1.2 billion people and a gross domestic product (GDP) of US$2.5 trillion. To put the AfCFTA into context, it will essentially be the world’s largest free trade area since the formation of the World Trade Organization (WTO) in terms of numbers of participating countries.
Forty-four African countries have signed the AfCFTA Agreement, with the notable exception of Nigeria, which says it requires more time to consult with the private sector and trade unions.
Despite this setback, African countries have largely been buoyed by this historic milestone, rooted in the vision of Kwame Nkrumah who, back in 1963 had urged Africa to unite.
Africa is a highly dynamic market. The population of Africa is projected to reach 2.5 billion by 2050, at which point it will include 26 percent of the world’s working age population, with an economy that is estimated to grow twice as rapidly as that of the developed world. Yet, businesses on the continent currently face average tariffs of 6.1 percent when they export within Africa.
The AfCFTA will change this picture by progressively eliminating tariffs on intra-African trade, easing trade flows between businesses within Africa, and allow foreign businesses that want to trade with Africa to take advantage of a more unified and growing continental market. Indeed, the United Nations Economic Commission for Africa (UNECA) estimates that the AfCFTA has the potential both to boost intra-African trade by 53.2 per cent by eliminating import duties, and to double this trade if non-tariff barriers are also reduced.
The Main Features of the AfCFTA
The AfCFTA will ensure the progressive elimination of duties and quantitative restrictions on imports, which are to be treated no less favourably than domestic products.
There are protections for infant industries and general exceptions. There are also provisions on trade facilitation and transit and cooperation over product standards and regulations. In case of surges of imports or unfair trade practices, the rules allow for trade remedies such as safeguards and countervailing duties.
In addition, there are provisions for technical assistance, capacity-building and cooperation, in recognition of the fact that the countries of Africa are not at the same stages of development.
The AfCFTA goes beyond traditional trade agreements that merely reduce tariffs. It also liberalises services trade. This is crucial because services constitute roughly 60 per cent of Africa’s GDP. Many services are also inputs to production processes that in turn enable trade in goods, such as information technology. In the AfCFTA, African countries have committed to progressive services liberalisation in which domestic services markets are to be opened for service suppliers from other African countries.
Also beyond tariffs, non-tariff barriers (such as burdensome customs procedures and excessive paperwork), which are often a great impediment to businesses are to be eliminated. The AfCFTA will further discipline non-tariff barriers by establishing a mechanism for reporting and resolving such barriers on trade between African countries, helping businesses to demand solutions to such trading bottlenecks.
The AfCFTA also includes provisions for the recognition of technical and sanitary standards, transit facilitation and customs cooperation. By doing so, the aim is to significantly ease doing business across borders in Africa.
Responsibility for the implementation of the AfCFTA agreement will remain with the African Union Commission, which will establish an AfCFTA Secretariat to administer the Agreement.
The Benefits of the AfCFTA
Since African countries have traditionally been exporters of raw materials and other natural resources, the AfCFTA is significant in promoting the export of industrial products.
Africa desperately needs to diversify its trade away from extractive commodities and towards manufactured products. Using the AfCFTA to pivot away from extractive exports will help to secure more sustainable and inclusive trade that is less dependent on the fluctuations of commodity prices.
Tariffs on raw materials are already low and so the AfCFTA can do little to further promote these exports. However, by lowering intra-African tariffs on intermediates and final goods, the AfCFTA will create additional opportunities for adding value to natural resources and for diversifying into new business areas.
More jobs for Africa’s youth population
Perhaps most importantly, the AfCFTA will also produce more jobs for Africa’s burgeoning youth population. This is because extractive exports, on which Africa’s trade is currently based, are less labour-intensive than the manufactures and agricultural goods that will benefit most from AfCFTA. By promoting more labour-intensive trade, the AfCFTA creates more employment.
Small and medium-sized enterprises (SMEs) account for around 80 per cent of the region’s businesses, thus they are key to growth in Africa. Such businesses usually struggle to penetrate more advanced overseas markets, but are well positioned to tap into regional export destinations. Under the umbrella of the AfCFTA, SMEs can use regional markets as stepping stones for expanding into overseas markets at a later point.
Another way in which SMEs can benefit from the AfCFTA is that the rules will make it easier for them to supply inputs to larger regional companies, who then export. By way of example, large automobile manufacturers in South Africa source inputs, including leather for seats from Botswana and fabrics from Lesotho, under the preferential Southern African Customs Union trading regime. In effect, the AfCFTA can help SMEs to connect to larger value chains at the domestic and regional level, and in so doing, help them to grow and expand their businesses.
The AfCFTA thus makes the formation of regional value chains easier by reducing trade costs and facilitating investment. So while the countries that are larger and more industrialised can immediately seize the opportunities for production of manufactured goods, less industrialised countries can also benefit from the AfCFTA by linking into regional value chains and eventually, global value chains.
Even land-locked countries which tend to face higher costs of freight and unpredictable transit times due to their geographical circumstances will benefit from the AfCFTA Agreement, due to the fact that the AfCFTA includes provisions on trade facilitation, transit and customs cooperation. In this way, the AfCFTA allows a majority of African countries, no matter their size, location or circumstance, to benefit from the trade deal.
The Other Side of the Coin: The Action Plan for Boosting Intra-African Trade
Trade agreements on their own do not ensure development of economies. African countries have participated in other trade agreements in the past but they have seldom been translated into real benefits in terms of job creation and economic growth. In order to make the most of the AfCFTA, African countries must effectively address supply side constraints and weak productive capacities, infrastructural bottlenecks, deficient trade information networks, poor access to finance for traders and other economic operators, and restrictions on movement of people. They must use measures such as trade facilitation and trade in services as important catalysts for market access.
At the same time as they mandated the AfCFTA in 2012, the AU Assembly also launched the Action Plan for Boosting Intra-African Trade (BIAT), in a bid to deepen Africa’s market integration and significantly increase the volume of trade that African countries undertake among themselves. The BIAT Action Plan is organised into seven clusters as follows:-
- Trade policy: to ensure implementation of coherent and efficient trade policies at all levels;
- Trade facilitation: to deal with all other non-tariff related trade constraints;
- Productive capacity: to improve low and inefficient means of production;
- Trade related Infrastructure: crucial for achieving trade competitiveness and diversification;
- Trade Finance: to improve access to finance for economic operators;
- Trade Information: crucial for making rational business decisions;
- Factor market integration: to increase intra-regional mobility of factors of production such as labour and capital.
The BIAT Action Plan was developed to complement other existing initiatives also crucial in the boosting of intra-African trade such as the Action Plan for Accelerated Industrial Development of Africa (AIDA), the Programme for Infrastructure Development (PIDA) and the Comprehensive Africa Agriculture Development Program (CAADP), as well as the Protocol on Free Movement of Persons (which was also signed by several countries at the Kigali Summit). The challenge therefore for Africa lies in ensuring that there is smooth coordination and implementation of these initiatives as they liberalise goods and services under the AfCFTA.
With the required political will for smooth implementation and the attendant flanking measures described under the BIAT Action Plan, the establishment of the AfCFTA will significantly accelerate growth of intra-African trade and allow Africa to use trade more effectively as an engine of growth and sustainable development. It will assist in the fight against poverty and underdevelopment in the continent and expand trade and investment opportunities for Africa. Again, the world is watching as Africa tries to chart its own development course – for a welcome change.
Beatrice Chaytor is an international trade lawyer, specialising in providing advice and support to African governments in their engagement with regional and international trade policy processes. She is currently Senior Expert – Trade in Services in the Department of Trade and Industry at the African Union Commission, based in Addis Ababa, and works on the negotiations for the establishment of the African Continental Free Trade Area (AfCFTA). Prior to her position in the AUC, Ms Chaytor ran her own law firm, Chariot Eight in Freetown, Sierra Leone, providing legal services to local, regional and international clients on a range of corporate law matters including trade, investment, natural resources and environment.