The largest free trade area in the world, with a combined GDP of $3.3 trillion, came into effect on the first day of 2021. A look at what exactly implementation of a deal of this magnitude means.



By Paula Slier and Sasha Star



AFRICA’S TRADE RELATIONSHIPS HAVE BEEN irreversibly affected by three events – the Covid-19 pandemic and two important trade agreements.



At midnight on 31 January 2020, the withdrawal of the United Kingdom (UK) from the European Union (EU) officially came into force. The decision – Brexit – made by 52% of the British population resulted in the EU losing its second-largest economy and the Union Jack isolating itself in terms of trade, effectively quarantining in its own home. But for Africa, the move holds opportunities. Untapped export potential to the UK is large as is untapped UK export to Africa; the latter is worth more than $8 billion.



Yet, it is the new trade agreement implemented in Africa where interest should really be directed; 54 of the 55 African Union states on the continent have signed up for the African Continental Free Trade Area agreement (AfCFTA) which came into effect on the first day of 2021. Eritrea is the only country that chose to sit out – and there are various explanations as to why not unconnected to power and politics.



By creating the largest free trade area in the world, 1.3 billion people are now set to benefit from the elimination of tariffs on most goods, the liberalization trade of key services and the address of non-tariff obstacles to intraregional trade. The AfCFTA is estimated to bring Africa annual income gains of more than $130 billion per year.



The deal could not have come at a better time, though this was hardly factored in when the agreement was originally brokered in March 2018. Covid-19 has substantially impacted Africa’s tourism sector that accounts for much of its revenue— particularly for smaller nations — while the trade of goods, oil, and even food has also declined significantly as a result of the novel coronavirus.



“The pandemic has presented a historic opportunity to build a better future,” says the African Department of the International Monetary Fund (IMF). It stresses that “trade integration, along with domestic reforms to improve revenue mobilization, digitalization, competition, social safety nets, and climate-change mitigation, will be critical for the region’s resilience, growth and job creation”.



An extensive reduction of tariffs is the first step towards this. With 90% of taxed intraregional trade flows being contracted under the AfCFTA, current flows are due to increase by around 16%, or $16 billion.



“The AfCFTA, if implemented as laid out in papers, would usher an economic progression that would make China’s remarkable economic transformation look basic,” claims Ibrahim Anoba, the Managing Editor of AfricanLiberty.org.



“We’re talking about a continent with a consumer market as large as China but with a superior mineral and natural resources concentration.” The potential of the AfCFTA is enormous, but, as Anoba points out, this all depends on the players in the game. “The different thing about the AfCFTA is that it would take an absolute commitment from as many signatory states as possible to be efficient,” he says. “The first phase is the conceiving of the idea. The second is implementation; proper implementation. This is where we’re at. We cannot move further unless we do this right.”



What exactly does implementation of a deal of this magnitude mean, though?



With so many players involved, it is understandable that the AfCFTA will be enforced in stages. The instruments that are already operational include the regulations and administrative rulings applied by governments to determine the source of goods, services and investments known as the rules of origin; the monitoring and elimination of non-tariff barriers; as well as the schedule of tariff concessions and other specific commitments.



“Long term, the AfCFTA faces a Brexit type of threat from the larger economies which may feel like they are giving up too much autonomy by being part of the agreement,” warns Jamie Mighti, a South Africa-based political analyst. “This risk is higher in Africa than in the European Union because of increased economic disparities between states and Afrophobic attitudes.” Mighti believes that there are substantial levels of antipathy to the business presence of Africans from other states in the large African economies and that this could present a massive challenge to the success of the AfCFTA.



It is not all doom and gloom, however. Mighti is of the opinion that better inclusion of the youth on the continent is an excellent way to ensure that the agreement will thrive, and that more focus should be placed on aiding small and medium-sized businesses, as opposed to large entities. The IMF also feels that tariff reductions should be complemented by policies to reduce non-tariff bottlenecks to trade, and that agriculture-based and less diversified countries should combine trade policies with structural reforms that boost agricultural productivity to better leverage existing comparative advantages.



Overall, the AfCFTA has been packaged as an opportunity to lead Africa down a path of prosperity, or fall into greater economic depravity that will take decades to equalize. As Anoba sums up, “If things go according to plan, we can finally expect Africa to emerge as the global economy’s heartbeat a decade from now.”

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Ghana has been named the host of the African Continental
Free Trade Area (AfCFTA) following four years of talks to form a 55-nation
trade bloc. It will be the base for the AfCTA secretariat.



The opportunities for Africa with this new trade bloc are immense. The Economist Intelligence Unit estimates that the AfCFTA will create the world’s largest continental free-trade area, provided all 55 African Union (AU) members join, and has the potential to create an African single market of 1.2 billion consumers whilst eliminating about 90% of tariffs on goods over the next five years. 



So far, 44 African countries have signed up for the historic agreement, the world’s largest free trade area since the formation of the World Trade Organization.



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The AfCFTA is expected to boost the economies of African
countries through employment creation and the promotion of made-in-Africa
goods. But Kayode Akindele, a partner at TIA Capital, a pan-African investment
partnership focussed on credit-based investing across sub-Saharan Africa, is
not opening up the bubbly just yet.



“We already have ECOWAS [Economic Community of West African
States] which doesn’t seem to be working and so why don’t we sort that out
first before we enter a continental trade agreement for Africa?”



And he is not alone in his concerns. 



“There are other factors we need to also consider. Firstly, with the implementation of the AfCFTA, goods made in other continents could be disguised as made-in-Africa to qualify for duty free treatment. There could also be a reduction in government revenue and also this trade bloc also threatens the profitability and survival of infant industries,” says Vincent Acheampong, an economist based in the United Kingdom.



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Of the regional blocs in Africa, including EAC (East African
Community) and SADC (Southern African Development Community), the ECOWAS has
some way to go in terms of performance, according to Muda Yusuf, the Director
General of the Lagos Chamber of Commerce and Industry, in an interview with
CNBC Africa. But he believes there is still reason to be optimistic.



“A continental trading bloc is going to build on the success
of the regional blocs like ECOWAS and other blocs across Africa. So, this
integration is going to build on those blocs. In terms of performance, of
course ECOWAS is the least performing because East Africa is doing very well
and South Africa is doing far better also. But there is no perfect time for
things like this, what is important is for us to get a conviction that economic
integration will work for us and also if we can get our institutions to make it
work,” says Yusuf.



Amongst the many challenges of the ECOWAS is its failure to
implement its vision of a single currency, the ECO, which is part of its plans
to make Africa a more integrated continent. That vision has been postponed
several times by the 15-member group with the newest target date set for 2020
although most experts believe the date to be unrealistic.



The success of the AfCFTA requires not only a trade policy but also a manufacturing agenda, competition, industrial policies and property rights to work well according to Vera Songwe, the Executive Secretary of the UN Economic Commission for Africa, in a statement at the launch event that took place in Niamey, Niger. 



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The ninth edition of the flagship Assessing Regional
Integration in Africa report (ARIA IX) stipulates that AfCFTA’s success will be
due to its ability to actually change lives, reduce poverty and contribute to
economic development in Africa. 



In support of the new trade bloc, Ghanaian President Nana
Akufo-Addo pledged to donate $10 million to the AU to support the operationalization
of the secretariat of the AfCFTA.



Although the AfCFTA will be economically transformative for
Africa in the long-term, the immediate benefits will be restricted due to the
macro-economic uncertainties of regional trade.



“Most African countries are currently not producing the
goods and services that their neighbors import, as a result we do not trade a
lot with each other. It is easier for an African country to trade with a
country in Europe than a country that lies right next to it and these low
levels of intra-African trade need to be addressed before we can reap the full
benefits of the AfCFTA,” says Acheampong.

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