A continental trade bloc could transform Africa’s economies

Trade between African countries is fragmented, making economies ofscale hard to achieve. A planned 55-country free-trade area promises much-needed integration.

An ambitious pan-African economic bloc- the AfricanContinental FreeTrade Area (AfCFTA)- was launched on 21 March at an African Union (AU)summit in Kigali, Rwanda. If it takes shape as envisaged, AfCFTA will comprise all55 AU members, making it the world’s largest free-trade area by country coverage. Its creation presents an opportunity for continental-scale integration of African economies, currently held back by market atomization, disjointed regional trade arrangements and overexposure to the commodities sector. However, competing political and economic agendas, and resistance to market opening in some countries and sectors, present obstacles to success. In addition, harmonizing trade rules and standards among Africa’s existing patchwork of economic communities will be technically challenging.

Three principle factors reinforce the case for integration. First, the progressive elimination of most tariffs on intra-African trade (combined with measures such as regulatory harmonization and the streamlining of customs procedures)wouldboosttradeandinvestmentbetweenAfCFTAmembers.African firmsincur higher tariffs on their exports to other African markets than those that apply when they export outside the continent.1 The UN’s Economic Commission forAfrica (ECA) estimatesthatAfCFTA’seliminationofimportdutiescouldboost intra-continentaltrade by 53 per cent, and could double it if non-tariff barriers are alsolowered.2 TheAUand ECAnote that lowering tariffs on intermediate and final goodswould be particularly beneficial, astariffs on rawmaterials are already low. This could incentivize ‘African economies to develop higher-value-added uses of
their natural resource bases.

A consolidated internal market would help early-stage industries to become established, and build on the synergies already in evidence – though not yet fully exploited- in continental trade: African economies attain almost twice the value addition when exporting to their neighbours that they achieve when exporting to other parts of the globe. An increase in intra-African trade is also necessary in the context of historically low economic integration: intra-regional trade accounts for only 20 per cent of Africa’s total trade – albeit an improvement on the 12 per cent figure recorded a decade ago.3

Second, more frictionless borders would help exporters (particularly those in landlocked countries) to reach non-African markets more effectively and compete globally. AfCFTA countries would be better able to develop cross-border supply chains optimized according to comparative advantage and the location of suppliers and inputs. Moreover, trading as a bloc could encourage investment in transport infrastructure and trade facilitation services, creating a virtuous cycle of demand- and supply-side gains.

A third, and related, benefit of better connectivity is that it would support diversification: many African countries remain stuck in economic models that depend on exports, above all of commodities. Only Lesotho, Morocco, Tunisia, South Africa and Swaziland are considered by the UN Conference on Trade and Development as ‘export diverse’. Widening the export base would improve countries’ resilience, for instance to volatility in harvests anti commodity prices.

As with most modern free-trade agreements(FTAs), AfCFTA will cover more than merchandise trade. In addition to the gradual elimination of tariffs, AfCFTA will seek to liberalize services, investment, intellectual property rights and competition policy. It will consolidate the current patchwork of bilateral and regional economic agreements and groupings into one coherent whole – boosting cooperation on shared infrastructure, standardized rules of origin and phytosanitary norms; and supporting investment in education, health and cross-national logistical hubs.

This breadth of coverage reflects growing recognition of the limitations of economic development predicated on low-end exports. The shifts occurring in the Chinese industrial model are illustrative, heralding the end of export-oriented manufacturing as a driver of structural economic transformation. With cheap labour and other comparative advantages, Africa can still profit to some extent from the delocalization of low-value manufacturing . However, with the continent a latecomer to industrialization, the prospects of such a model on its own providing a durable boost to employment or GDP growth are minimal.

Rather, the real opportunities lie in manufacturing for the African consumer market. With a combined GDP in 2017of around $6.4 trillion on a purchasing power parity (PPP) basis,4 a population of 1.2 billion,5 favourable demographics – given its youth bulge and rapid urbanization – and a burgeoning middle class, the continent is potentially attractive to global brands anxious to expand from mature markets. From an African perspective, the concern is that opening domestic markets could render local companies less competitive. However, AfCFTA’s common external tariffs will offer some breathing space. Exempt from such tariffs, African suppliers may be in a stronger position to develop regional value chains in closer proximity to their target markets – this may help emerging local firms to develop until they can compete with established international players.

A number of potential obstacles stand in the way of successful realization of AfCFTA. The first is that effectiveness is contingent on full, or near-full, membership (although only 22 countries need to ratify AfCFTA for it to come into effect- a development some expect by the end of this year).6 At the Kigalisummit, 44 AU member states signed the AfCFTA consolidated text. The remaining 11 non-signatories included Nigeria and South Africa, the continent’s largest and third-largest economies respectively.7 South Africa has delayed signature because it considers the agreement incomplete, as no tariff schedules are in place and key annexes and protocols are unfinished (these are supposed to be finalized by the end of 2018). However, at the time of writing, South Africa’s parliament was already discussing AfCFTA. Other non-signatories have indicated their support in principle – Namibia, for example, has indicated that it will sign8 – though domestic and regional politics could complicate AfCFTA ratification, with the approach of elections in Nigeria in 2019, for instance, potentially motivating cautious political positions on market liberalization

Assuming these issues are overcome, the main challenges will be around the technicalities and sequencing of implementation, including the need to consolidate under AfCFTA multiple provisions of pre-existing trade relationships and agreements. Although the continent’s regional economic communities (see table) have committed to the principle of alignment with AfCFTA, the harmonization process is complex and will take years to complete.

A final challenge to the successful implementation of AfCFTA’s ambitious agenda lies in the mood of protectionism that is shifting the rules of engagement in world trade. In the face of rising populist opposition to globalization, AfCFTA will have to remain a visible priority for African governments and institutions, able to demonstrate why it offers opportunities in a technology- and globalization driven era of disruption to established economic models.

However, if commitment to AfCFTA can be sustained – and if accompanying efforts to liberalize movement of people also progress – the benefits could be substantia l.•

Carlos Lopes is an associate fellow with the Africa Programme.