The Challenges and Benefits of African Continental Free Trade Area (AfCFTA)

The Challenges and Benefits of African Continental Free Trade Area (AfCFTA)

By Adeola Onikoyi 

On the 7th of July 2019 at the 12th Extraordinary Session of the Assembly of the Union on African Continental Free Trade Area (AfCFTA) in Niamey, Niger, Nigeria signed on to the African Continental Free Trade Agreement, marking a landmark moment in the history of the African continent as Nigeria joined a list of 54 African nations (Eritrea, the only hold out has indicated interest in signing the agreement) in signing on to what will be the largest trading block in the world. With the inclusion of the Nigerian and South African economies, the agreement is poised to bring on an unprecedented opportunity for the free movement of goods and indeed people across the African continent.

However, the success of this agreement lies in African countries tackling and solving some of the deeply rooted issues that have held back and bedevilled free trade across the continent for decades. This article will look at some of the benefits of this agreement, as well as some of the challenges it is sure to face.

Background

The AfCFTA was conceived in January 2012 after the 18th Ordinary Session of the Assembly of Heads of State and Government of the African Union, held in Ethiopia. It was agreed that a Continental free Trade Area will be established with the following objectives;

  • To create a single continental market for goods and services, with free movement of business persons and investments, and thus pave the way for accelerating the establishment of the Continental Customs Union and the African customs union.
  • To expand intra African trade through better harmonization and coordination of trade liberalization and facilitation regimes and instruments across Regional Economic Communities (RECs) and across Africa in general.
  • To resolve the challenges of multiple and overlapping memberships and expedite the regional and continental integration processes.
  • To enhance competitiveness at the industry and enterprise level through exploiting opportunities for scale production, continental market access and better reallocation of resources.

The agreement was then agreed to and signed by 44 countries at the 10th Extraordinary Session of the African Union on AfCFTA in Rwanda. An additional 10 countries have also now signed on to the agreement with ratification occurring at a speedy pace and the agreement came into force (technically) on 30 May 2019.

Benefits

As I previously stated, the AfCFTA will create the largest trading block in the world. The thing is, with all 55 African countries signing on, this agreement will be the world’s largest by number of countries, covering more than 1.2 billion people and a combined GDP of $2.5 trillion, according to the UN Economic Commission for Africa (ECA). Furthermore, the agreement mandates that countries joining AfCFTA must commit to removing tariffs on at least 90% of the goods they produce. The benefits of these are obviously enormous. Economists believe that tariff-free access to a huge and unified market like the one envisioned in this agreement, will encourage manufacturers and service providers to increase production; an increase in demand will instigate an increase in production, which in turn will lower unit costs. This will lead to consumers paying less for goods and services thereby helping to improve the economies of several African countries.

One of the major benefits of the agreement is that it will open up new markets for a lot of African owned companies. The agreement will allow African owned companies to expand their customer base and lead to new products and services. What this does is that it not only helps companies grow, it will also make investing in innovation viable.

In furtherance of this, another major benefit of the agreement is that it will help grow the manufacturing sector and increase the percentage of GDP manufacturing contributes. Presently, manufacturing represents only about 10% of total GDP in Africa, on average and this is well below levels seen in many other developing regions. A bigger and more robust manufacturing sector will lead SMEs to create more well-paid jobs, especially for young people.

Significantly, the AfCFTA will lead to a reduction in input costs when it comes to manufacturing. This is so because the agreement will ease the process of importing raw materials from other African countries. It will also enable SMEs to set up assembly firms in other African countries, to access cheaper means of production.

These are just some of the benefits of the agreement and however wonderful it all sounds, the agreement is sure to face some certain challenges.

Challenges

Transportation…… Arguably the single biggest infrastructural challenge that has held back the African continent for decades. The issue of transportation and logistical challenges on the African continent is one so fundamentally rooted in the pace of development across the continent that one can easily see the link between the more developed African nations, their transportation networks and economic growth, compared to their African counterparts. The issues relating to the easy transportation of especially perishable goods across the African continent will be a major challenge countries need to solve or at the very least have a plan for, for the AfCFTA to truly work. Abolishing tariffs and removing trade barriers are all well and good and will make an impact. However, if the costs of transporting goods from Ghana to Ethiopia far outweigh any potential benefits of a tariff free trade, then is it worth it? If moving goods from the port city of Mombasa and delivering them in Bamako, Mali will be nearly impossible, then some will say, what is the point? Road networks both within countries and across the border of especially landlocked countries must be improved. Rail networks must be built and existing ones improved and upgraded. Air transport also must be better as all these will ease the movement of goods across the continent.

Another major challenge and problem that will be encountered will be the potential increase in competitive pressure and the choking of local SMEs. Many emerging African markets rely on farming for employment. These small family farms will not be able to compete with large agri-businesses in high-income African countries like South Africa, Kenya, Ethiopia, Egypt and Nigeria. This will lead loss of farms, income, and a potential to increase unemployment. The fact that consumers will always prefer cheaper products may also lead to local producers losing huge sales to foreign suppliers, because they can lower the cost of their products by leveraging on the reduced tariffs imposed on imported goods. The dumping of cheap products by countries with already established manufacturing industries on smaller nation is a real possibility and is dangerous. It will stall growth and is one of the reasons countries like Nigeria and South Africa were hesitant to sign the agreement.

Significantly, the threat the agreement poses to the protection of intellectual property in Africa is not talked about much. The agreement could potential leave African companies more open to intellectual property theft. The fact is that many African countries don’t have enough laws in place that protect patents, inventions and new processes. The laws they do have aren’t always strictly enforced. As a result, companies’ ideas often get stolen. With the AfCFTA, this could get worse as new ideas and innovations might lose protection moving across borders so easily.

Conclusion

Having laid out some of the potential benefits and challenges of the AfCTA, I will conclude with this. I believe it is a better option than the current reliance on foreign aid and cheap foreign products. Quite a few western countries and trading blocs have indicated interest in signing a trade deal with Africa over the years and this shows the potential of African trade. The fact that intra African trade is also low has created this unique opportunity for African countries to truly strive for independence long after the colonisers have gone. Some have argued that the trade deals and agreements African countries sign with western countries and blocks give room to new kinds of colonialism. Well, this is an agreement made by Africans for Africans. I believe it can work. However, the challenges have to be met and faced head on.

Share this post

Post Comment