In March 2018, African countries signed a landmark trade agreement, the African Continental Free Trade Area Agreement (AfCFTA), which commits countries to remove tariffs on 90 per cent of goods, progressively liberalise trade in services, and address a host of other non-tariff barriers. Here are some benefits expected from the trade deal, according to research by Brookings Institution
If successfully implemented, the agreement will create a single African market of over a billion consumers with a total gross domestic product (GDP) of over $3 trillion (Sh300 trillion). This will make Africa the largest free trade area in the world.
What is less known about the AfCFTA is that its scope exceeds that of a traditional free trade area, which generally focuses on trade in goods, to include trade in services, investment, intellectual property rights and competition policy, and possibly e-commerce.
2. Fair distribution
The signing of the Africa free trade area deal in Kigali comes at a time when the benefits of trade are actively contested, and global powers that traditionally promoted trade as a crucial driver of growth are now calling into question its very tenets.
This apprehension is not without cause. It is broadly recognised that, while globalisation and trade produced the impressive economic expansion of the past three decades, the gains have not been fairly distributed.
The World Bank population-weighted Gini index shows that inequality rose steeply between 1988 and 1998 and declined only moderately by 2013. Although global poverty has fallen, prosperity has not been fully shared.
3. Trade stimulation
The share of intra-African exports as a percentage of total African exports has increased from about 10 per cent in 1995 to around 17 per cent in 2017, but it remains low compared to levels in Europe (69 per cent), Asia (59 per cent), and North America (31 per cent). This is an important reason to expect that trade will be a key driver of growth in Africa.
According to modelling results by the Economic Commission for Africa (ECA), AfCFTA will be a game changer for stimulating intra-African trade.
It is projected, through the sole removal of tariffs on goods, to increase the value of intra-African trade by between 15 per cent ($50 billion or Sh5 trillion) and 25 per cent ($70 billion or Sh7 trillion), depending on liberalisation efforts, in 2040, compared to a situation with no AfCFTA in place.
The deal will also promote diversification of exports which is important as it allows countries to build resilience to movements in demand, due to economic downturns in importing countries but also price dips. In the case of commodity exporting countries it supports a shift from an over-reliance on commodities to higher-value added products and services.
Economic diversification allows for more inclusion of small and medium sized enterprises and helps encourage innovation as more markets open. It is also productivity enhancing. Between 1990 and 2014, as most fast growing countries in the world diversified their economies, most African countries instead relied on rents from extractive industries.
4. Agricultural expansion
The Africa free trade area agreement offers particular potential for agricultural products. In 2015, African countries spent about $63 billion (Sh6.3 trillion) on food imports, largely from outside the continent.
ECA’s modelling projects that by 2040, the deal will increase intra-African trade in agricultural products by between 20 and 30 per cent, with the highest gains in sugar, vegetables, fruit, nuts, beverages, and dairy products.
5. Market access
The agreement is expected to expand access to markets at the regional and international levels, thus generating state revenue, increasing farmer income, and expanding both farmer and country capacity to invest in modernising the agricultural sector through processing and mechanisation.The AfCFTA as a result should stimulate demand for intra-African food imports, supporting a predominantly women-led sector.
6. Quality exports
The quality growth has been especially substantial in manufacturing, although the quality of commodities has also increased due to the development of vertically integrated industries.
On the diversity criteria, African exports have generally lagged behind, and there is no evidence of quality convergence. The Africa free trade area deal will improve export sophistication across the continent by enabling more countries to integrate regional and global value chains and consequently increase the quality of exports.
7. Knowledge transfer
Analysis of sectoral quality shows that some richer and more open African countries have well established manufacturing exports, such as South Africa and Morocco.
Like the East Asian economies, they may have reached a saturation point to quality improvement within existing sectors and may need to target new geographic markets that can provide greater scope for growth and innovation to improve their competitive advantage.
Other countries, such as Botswana and Mali, have successfully moved up the value chain within their natural resource sectors. In these countries, knowledge transfers to other export sectors can unlock the potential of established or emerging industries.
8. Trade facilitation
The Africa Continent Free Trade Agreement potentially embodies a “win-win” approach such that all countries across Africa and vulnerable communities within these countries receive benefits from the agreement.
Boosting Intra-African Trade Action Plan offers a framework for addressing key constraints to intra-Africa trade and diversification under seven clusters: trade policy, trade facilitation, productive capacity, trade related infrastructure, trade finance, trade information, and factor market integration.
Trade facilitation is considerably important to reducing non-tariff trade costs, and is essential for ensuring inclusive benefits since landlocked countries and small, informal, and female traders are usually more burdened by inadequate trade facilitation.
9. Productive capacity
Through re-skilling programmes, the trade agreement will be crucial in ensuring that displaced workers and vulnerable persons are able to participate in welfare-enhancing. African countries must develop effective policies and strategies for exports, and identify new opportunities for diversification, industrialisation, and value chain development.
In particular, Africans must be equipped with the skills needed to engage in skill-intensive manufacturing industries such as apparel and machinery. Countries are already strategising on how to develop clear plans of action to take advantage of national, regional, and global markets in the proper and structured AfCFTA context.
10. Political tolerance
It is well known that resources have played a “negative role” in many of Africa’s bloodiest wars. With the free trade area deal, some neighbouring countries who share common but contentious borders are likely to feel included so that everyone has a piece of the pie. With the richness and vastness of wealth, equitable sharing would thus serve the purpose of reducing tensions and encouraging cross border trade and brotherhood.