Opinions & Features August 02, 2019 at 08:43 am

African Continental Free Trade Area: Prospects and risks

Alexander Ayertey Odonkor August 02, 2019 at 08:43 am

August 02, 2019 at 08:43 am | Opinions & Features

Alexander Ayertey Odonkor August 02, 2019 at 08:43 am

August 02, 2019 at 08:43 am | Opinions & Features

Photo via African Union

Africa’s quest for regional integration predates independence but this has been accelerated by globalization and the need to have a strong bargaining power as a continent in the international system.

Regional integration in Africa has been hampered by the lack of political will exhibited by member states, political instability, multiplicity of memberships to Regional Economic Communities (RECs) and inadequate funding among others.

The positive correlation between trade and development cannot be underemphasized and this is evident in other regions of the world. Intraregional trade in Europe is estimated at 70 percent as against 51 percent in Asia, 54 percent in North America and 19 percent in Latin America. In Africa, intraregional trade stands at just about 15 percent hence the need to boost regional trade. It is against this background that African leaders signed a free trade agreement to boost intraregional trade in May last year.

On 30th May, 2019, the AfCFTA agreement entered into force after a minimum 22 ratifications was achieved in accordance with Article 23 of the agreement. The objectives of the AfCFTA are as follows;

  • Create a single continental market for goods and services, with free movement of business persons and investments, and thus pave the way for accelerating the establishment of the Continental Customs Union and the African customs union.
  • Expand intra African trade through better harmonization and coordination of trade liberalization and facilitation regimes and instruments across RECs and across Africa in general.
  • Enhance competitiveness at the industry and enterprise level through exploiting opportunities for scale production, continental market access and better reallocation of resources.
  • Resolve the challenges of multiple and overlapping memberships and expedite the regional and continental integration processes.

According to the African Union (AU), intra-African trade is estimated to increase by 52.3 percent (US$34.6 billion) under the AfCFTA, compared to the current arrangement without AfCFTA. The free trade area will cover a market of 1.2 billion people and a gross domestic product (GDP) of US$2.5 trillion, across 54 member states, out of the 55 AU states. Leaving out just one country-Eritrea is the only country that has not joined the agreement. The continental trading bloc is expected to be the world’s largest free trade area since the formation of the World Trade Organization (WTO) in terms of the number of participating states.

The benefits of AfCFTA are enormous. Producers will gain access to cheaper primary and semi-processed inputs from other African countries. The trading bloc also assures a larger market projected to reach 2.5 billion by 2050. This will ensure efficiency in production and economies of scale. On the other hand, consumers will have access to cheaper products from other trading partners on the continent. According to United Nations Conference on Trade and Development (UNCTAD), African companies selling goods on the continent still face a tariff of 8.7 percent versus 2.5 percent when selling outside Africa.

Furthermore, AfCFTA will also help eliminate the challenges associated with multiple and overlapping trade agreements in Africa. At present, the various RECs have their individual trade agreements. The multiplicity of memberships to different RECs makes it more difficult to have a uniform trade agreement on the continent. For example, Burundi, Côte D’Ivoire, Democratic Republic of Congo and Rwanda belong to more than one REC.

More so, a single trading market provides incentives for inward Foreign Direct Investment (FDI) and cross-border investment. FDI flows to Africa declined by 21 percent to US$42 billion between 2016 and 2018 according to the 2018 UNTAD World Investment Report. The investments largely came from outside the continent. An enlarged regional market provides incentives for FDI and cross-border investment. Africa has a lot of small markets yet many industrial investments require large economies of scale to be profitable. AfCFTA will create the scale necessary for more investment.

Despite the envisaged benefits of a continental free trade area, the risks are as real as its prospects. Infrastructure is essential in unlocking the economic potentials of Africa. The World Bank and United Nations Economic Commission for Africa (UNECA) peg Africa’s infrastructure deficit at US$93 billion annually and about one-third of this figure for maintenance. Access to power continues to be a leading bottleneck in addressing infrastructure deficit on the continent. According to the African Development Bank (AfDB), Africa’s power connectivity is at 39MW per million inhabitants, the lowest in any developing region. More than 30 African countries experience recurrent outages and load shedding, with opportunity costs amounting to as much as 2 percent of the total annual value of the economy. The need to bridge the infrastructure gap on the continent is a catalyst for boosting intra-regional trade and achieving a fully integrated continent.

Homogeneity of goods is another challenge that hampers intraregional trade on the continent. The big question is, what are African countries trading in? Cote d’Ivoire and Ghana are the two largest producers of cocoa beans globally exporting 38 percent and 17 percent respectively. Ghana and South Africa are the top two producers of gold in Africa. Libya, Nigeria, Algeria, Egypt and Angola produce crude oil in large quantities. Most of these aforementioned commodities are exported in their raw forms but returns to the continent as semi-finished and finished goods. Africa spends billions of dollars importing goods that are produced outside the continent like automobiles, automobile parts, computers, mobile phones, pharmaceuticals etc. For the continent to reap the benefits of a free trade area, massive investment must be channeled into import substitution industrialization.

In conclusion, a free trade area will create a larger market for producers whiles consumers will have access to a variety of goods and services. It will also increase competitiveness which will foster efficient use of resources on the continent. For Africa to enjoy the benefits of an integrated market, substantial investment should be channeled into infrastructure development both soft and hard. It is also imperative to point out that, facilitating Public Private Partnership (PPP) will help in building infrastructure to boost regional trade and development. Dealing with corruption and illicit financial flows on the continent will generate savings for infrastructure development. Embarking on import substitution industrialization on the continent will help Africa reap the gains of a free trade area on the continent. AfCFTA has the potential to lift millions of Africans from poverty hence the need for concerted effort by states to fully implement the agreement.

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