03 Jun African Continental Free Trade Area: All you need to know
Understanding the African Continental Free Trade Area (AfCFTA)
The biggest free-trade area in the world came into force on 1st January 2021 – and includes nearly all African countries. Full of promise, the African Continental Free Trade Area (AfCFTA) will need to overcome a number of significant obstacles before becoming fully operational. We explain how this agreement could reshape African economies for the better.
The Covid-19 pandemic struck Africa and indeed, the rest of the world, in an unprecedented manner. While it appears the continent has been spared the worst human casualties, its economies have suffered their biggest shock for a long time. “42 out of 55 countries last year were either in a full or partial lockdown, which meant that there were no goods that were transmitting through borders”, Wamkele Mene, secretary-general of the AfCFTA’s Secretariat, told Chinese news agency Xinhua. In 2021 alone, “our export capacity reduced by up to 35%”, he added. “That is why, in order for Africa to expedite the recovery, we have to implement this agreement quite aggressively.”
Launched on 1 January 2021, the AfCFTA has established the largest global free trade area by countries participating – to date, all African countries but Eritrea have signed the agreement and 36 have ratified it. It now brings together 1.2 billion people with a combined gross domestic product (GDP) of more than 2.5 trillion dollars. Signed on 21 March 2018 at the 10th Extraordinary Session of the African Union (AU) on AfCFTA, its coming into force was delayed because of the coronavirus pandemic. But now that it is operational, state parties are hoping the AfCFTA will compensate for some of the economic damage that the global health crisis has inflicted on the continent.
Primary objective: increase intra-African trade
The AfCFTA’s primary goal is to boost trade across the continent. Intra-African trade is currently very low, amounting to just 16.6% of total trade, compared with 68% in Europe, and 59% in Asia. To increase those figures, the 54 signatories of the AfCFTA agreement agreed to eliminate all tariffs on 90% of goods and reduce non-tariff barriers, such as the time it takes goods to pass through customs. The least developed countries (LDCs) in Africa, for which tariffs are still a big source of revenue, have ten years to achieve this goal. Non-LDCs have only five.
Among the remaining 10% of products, 7% are considered “sensitive products”. All countries can maintain their current tariffs on them for five years. Then, LDCs have 13 years to eliminate tariffs and Non-LDCs have a decade. 3% of goods are excluded from liberalisation altogether. “Today, average tariffs across the continent amount to 8%”, David Luke, Coordinator of the African Trade Policy Centre at the UN’s Economic Commission for Africa (UNECA) told The Africa Centre.
Estimates from UNECA suggest that the AfCFTA has the potential to boost intra-African trade by 52.3% and to double this trade if non-tariff barriers are also reduced.
To achieve this goal, the AfCFTA also wants to develop an African digital economy, promoting start-ups with a Pan African vision. For instance, in December 2020, the AfCFTA Secretariat launched the AfCFTA Vision Challenge, a series of contests for African start-ups in eight areas (education, healthcare, agriculture, infrastructure, governance, trade integration, technology, manufacturing, and environment). The results are still to be announced.
Potential for all sectors of African societies
The promise of the AfCFTA agreement is significant. According to a report from the World Bank, the AfCFTA will lift 30 million Africans out of extreme poverty by boosting wages for unskilled workers by 10.3% and for skilled workers by 9.8%. It is also expected to speed up wage growth for women by allowing them to conduct trade through more formal channels and boost regional income by 7%, up to 450 billion dollars – all of this by 2035.
“If successfully implemented, the AfCFTA could generate a combined consumer and business spending of 6.7 trillion dollars by 2030”, estimates the Mo Ibrahim Foundation.
All these economic benefits are timely, given that Africa could suffer GDP losses in 2020 between 145.5 and 189.7 billion dollars because of Covid-19, according to the African Development Bank. “The AfCFTA offers a route for stronger recovery from the recession-induced by the Covid-19 crisis”, said David Luke.
A focal point for achieving the AfCFTA’s goals: improving infrastructure
At present, these objectives are far from being met and the agreement is not short of challenges. “If you don’t have the roads if you don’t have the right equipment for customs authorities at the border to facilitate the fast and efficient transit of goods. If you don’t have the infrastructure, both hard and soft, it reduces the meaningfulness of this agreement.” The main challenge to the AfCFTA’s success, here summarized by Wamkele Mene to the Financial Times, concerns infrastructure. Infrastructure improvements will be needed in nearly all areas to achieve the benefits of this trade agreement, including electricity, transport, logistics, and digital infrastructure. For example, more than 820 million people in sub-Saharan Africa lack access to an internet connection, and nearly 600 million go without grid electricity.
According to the African Development Bank, Africa’s infrastructure needs are substantial at 130 to 170 billion dollars a year, with a financing gap between 68 to 108 billion dollars, driving most countries’ trade outward rather than inward. To help improve the logistics infrastructure, the European Union Commission has granted 1.9 million euros to DIGILOGIC in March 2021. This is a new project that aims to bring European and African innovation hubs together to enable innovators, start-ups, and SMEs to jointly develop smart logistics solutions in close cooperation with industries and investors.
The second biggest challenge for the AfCFTA is the actual implementation of the agreement by the countries themselves. At present, several countries in West Africa have still not fully implemented existing agreements like the Economic Community of West African States’ (ECOWAS) Travel Certificate. In August 2019 for instance, Nigeria closed its borders with neighbouring Benin and later denied movement of all goods from Niger – more than forty years after the establishment of ECOWAS.
What’s next: competition, investment, and intellectual property
Overall, the AfCFTA agreement is the next big step in the long history of trade integration in Africa, on the road to building a single market, in line with the African Union’s Agenda 2063. Once the aforementioned phase one, on intra-African trade, is progressing, a second phase will focus on cooperation, local and foreign investment, competition, and intellectual property rights, and then the third one on e-commerce will start. The World Bank suggests the AfCFTA could mean an added 76 billion dollars in income for the rest of the world.
However, several questions remain on this matter. One significant example concerns the free-trade provisions mentioned above. They only apply to African goods, for which the AfCFTA has introduced a rule of origin. However, what this implies has not yet been clarified or agreed upon: it could be based on the percentage of value-added or could require that certain manufacturing processes be carried out within the country or zone of origin. This rule will be key to responding to concerns that foreign investors could set up shop, make a minimal commitment to the economy, and then benefit from the AfCFTA to export duty-free to other African countries. The AfCFTA secretariat says that it expects the final discussions on the rules of origin to be completed “by 30th June 2021”, said David Luke.
This article is the first in a series on the impact of the AfCFTA on African economies and foreign businesses and investment to be published on The Africa Centre website. Stay tuned for the next instalment.