The African Continental Free Trade Area (AfCFTA), launched in 2018 and now in its operational phase, is a landmark deal that aims to bring together 54 African countries with a combined population of more than 1 billion people and a combined GDP of over US$3tn.
The ultimate aim of the agreement is to establish a single African market for goods and services, accompanied by the free movement of people and capital. The deal is expected to stimulate intra-regional trade flows, address the continent’s industrial deficit, and reduce its over-reliance on primary goods exports.
But tangible benefits with a wider reach across the continent will likely only be realised from 2030 onwards due to a number of obstacles, says new research from Baker McKenzie and Oxford Economics.
Titled AfCFTA’s US$3 trillion opportunity: Weighing existing barriers against potential economic gains, the report looks at the gains and benefits for the continent as a whole, and examines the barriers to the deal’s effective implementation.
GTR speaks to Mattias Hedwall, partner and head of Baker McKenzie’s global international commercial and trade group, about the progress of the deal thus far, who the winners and losers are likely to be, and how this relates to the report’s key findings.
GTR: What’s the latest in terms of the AfCFTA’s progress?
Hedwall: The operational phase of the AfCFTA agreement was launched at the African Union (AU) summit in Niger in July 2019. Nigeria and Benin became signatories to the agreement, bringing the number to 54 out of 55, with only Eritrea still to join. The AU is currently putting AfCFTA into operation and, so far, it’s in force across 27 countries. The agreement is slated to take effect in June 2020.
GTR: Which countries will be the biggest winners and losers of the agreement, and why?
Hedwall: New research from Baker McKenzie and Oxford Economics reveals some countries are better placed than others to reap the rewards of intra-regional trade. Those with good trade integration and open economies are most likely to benefit.
South Africa stands to see the maximum benefit from AfCFTA due to its existing strong connections across the continent and well-established manufacturing base. Smaller economies, such Ghana and Côte d’Ivoire, will benefit from the agreement due to having open economies, good infrastructure and supportive business environments.
The report also lists Ethiopia as a promising investment destination. The government is boosting power generation capacity and transport links, while undertaking an ambitious policy reform project to attract investment. Rwanda is also an inviting operating base for companies, thanks to regulations that make it easy to set up a company. South Africa and Morocco will continue to attract FDI as they have long been competitive exporters of goods.
Countries with relatively less manufacturing capacity and weaker trade ties, such as Algeria and Sudan, also have higher political and security risks, undermining their ability integrate into regional value chains. And Angola is heavily dependent on hydrocarbons, limiting its ability to fully capitalise on the AfCFTA deal in the near-term. All three economies should diversify and become more receptive to FDI.
GTR: In what way will the agreement impact Africa’s trade in goods and services?
Hedwall: Currently, Africa ranks behind other regions in terms of its level of regional trade integration. AfCFTA’s intra-regional trade share of 17% compares to 64% for the European Union and 50% for the US Mexico Canada Agreement. Trade links between Africa and the rest of the world are often stronger than trade between countries on the continent. These intra-continental trade shortcomings underscore the extent of lost revenue and development opportunities for Africa.
The report compares Africa’s 20 largest economies in terms of the share of exports destined for other economies on the continent. Some, such as Uganda and Zimbabwe, buck the trend, trading more with their neighbours than other countries. Yet, their economies are small compared to Egypt, Nigeria and South Africa, which together represent more than half the continent’s GDP. Egypt and Nigeria have limited trade relationships with their African peers: as major fuel exporters, they are focused on exports outside the continent.
Over three-quarters of African exports to the rest of the world are focused on natural resources, primarily raw materials. In contrast, African imports from outside the continent reveal that manufacturing products, industrial machinery and transport equipment constitute over 50% of Africa’s combined needs. Africa’s external imports account for more than half of the total volume of imports, with the most important suppliers being Europe (35%), China (16%) and the rest of Asia including India (14%). Imports from other parts of Africa account for only 16% of total merchandise imports.
Manufacturing GDP represents on average only 10% of GDP in Africa. Limited production capabilities within Africa are being compensated for through foreign imports. Yet, this manufacturing deficit could be satisfied within the continent and enabled by AfCFTA. Manufactured products currently exported to African countries by their peers, primarily industrial machinery and motor vehicles, represent a third of the total trade flow in Africa. But a significant share of these are re-exports of globally imported manufactured products.
There is a misalignment between what various African countries need and what is produced on the continent, signalling a missed opportunity to reduce foreign imports and increase trade flows within the continent. For AfCFTA to succeed fully, more countries need to diversify their production of goods to better match the import needs of their neighbours.
GTR: What’s going to be key to the success of the agreement?
Hedwall: AfCFTA’s success depends on the continent’s ability to overcome several big challenges, such as limitations in infrastructure, resources, political climate and existing regional trade agreements.
Regional integration in Africa is an unattained goal, despite the continent’s Regional Economic Communities (RECs). Overall, the RECs have complex and often conflicting policies and have achieved different levels of integration to-date.
Despite the challenges, some RECs have successfully encouraged effective trade between member countries. Côte d’Ivoire, Kenya, Senegal, Morocco and South Africa have become regional trading hubs, having leveraged alliances they established through their RECs. For African economies to further implement effective intra-regional trade they should draw on the lessons learned from these successful RECs.
The report underscores the importance of addressing non-tariff barriers to intra-regional trade. Some of the most significant obstacles are inadequate infrastructure, poor trade logistics, onerous regulatory requirements, volatile financial markets, regional conflict and complex and corrupt customs procedures.
There is a strong consensus that the vast infrastructure gap in Africa, including transport and utilities infrastructure, must be urgently addressed so as not to restrict increased trade integration. Large infrastructure projects in the pipeline – the Trans-Maghreb Highway in North Africa, North-South Multimodal Corridor, the Central Corridor project and the Abidjan-Lagos Corridor Highway project – should improve the situation.
AfCFTA is a strong impetus for African governments to address their infrastructure needs as well as to overhaul regulation relating to tariffs, bilateral trade, cross-border initiatives and capital flows. Both domestic and foreign trade will benefit from reforms to regulation, political climate and trade policies that enhance competitiveness and improve the ease of doing business.
Further, economies that are less export-oriented or have unfavourable business environments should identify their comparative advantages and key strengths, and leverage these to tap into new or established AfCFTA value chains.
It is also important to be realistic about timeframes. Effective solutions will take years, given limited financial capacity in many countries, high risks to private financing of infrastructure, political hurdles, administration shortfalls and lack of resources. However, we believe these challenges will be overcome and the next decade will see growth of the AfCFTA into an exciting new global trading zone.