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What is the AfCFTA?

by Tsitsi Mutendi

The African Continental Free Trade Area is a game-changing ambitious trade pact that is being implemented to form the world’s largest free trade area by connecting almost 1.3 billion people across 54 African countries. It aims to be a model of cross-border cooperation in an era of growing isolationism. Currently, Africa accounts for just two percent of global trade. And only 17 percent of African exports are intra-continental, compared with 59 percent for Asia and 68 percent for Europe. The potential for transformation across Africa is therefore significant. 

The agreement in practice aims to create a single market for goods and services in order to deepen the economic integration of Africa. The forecast for the trade area is that it could have a combined gross domestic product of around $3.4 trillion. However, achieving this full potential depends on significant policy reforms and trade facilitation measures across the continent’s signatory nations. 

In effect, the AfCFTA aims to reduce tariffs among members and covers critical policy areas such as trade facilitation and services, as well as regulatory measures such as sanitary standards and other technical barriers to trade. The agreement that made this pact possible was brokered by the African Union and was signed by 44 of its 55 member states in Kigali, Rwanda on March 21, 2018.

Notably, the only country still to sign the agreement is Eritrea, which is known to have a largely closed economy. As of Feb. 10, 2022, 41 of the 54 signatories had deposited their instruments of ratification with the chair of the African Union Commission, making them state parties to the agreement. The AfCFTA Secretariat is an autonomous body within the African Union based in Accra, Ghana. It is led by secretary general Wamkele Mene, and it is responsible for coordinating the implementation of the agreement.

Trading under the agreement officially commenced on Jan. 1, 2021, after a sixth-month delay as a result of the impact of COVID-19. The Ghanaian president, Nana Akufo-Addo, on Feb. 20, 2021, stated that the COVID-19 pandemic has heightened the importance of the success of the AfCFTA—a success that is now within reach, despite the current challenges. The president added, “The destruction of global supply chains has reinforced the necessity for closer integration amongst us so that we can boost our mutual self-sufficiency, strengthen our economies, and reduce our dependence on external sources.”

Although the implementation has started happening, the negotiations on many issues still need to be resolved before the agreement can fully function seamlessly. The negotiations have been divided into three phases:

  • Phase 1 negotiations: Trade in goods and services. Negotiations led to the ratification of legal instruments (the AfCFTA agreement itself and protocols on trade-in services and goods and settlement of disputes) that came into force on May 30, 2019, permitting the launch of trading. However, negotiations continue on many details.
  • Phase 2 negotiations: intellectual property rights, investment, and competition policy. Some of these negotiations have already begun.
  • Phase 3 negotiations: E-commerce These negotiations are due to begin when phase 2 is completed.

We cannot lose sight of the significant challenges that still exist. Three stand out. 

Implementation. A recent article by the African Center for Economic Transformation highlights how the agreement will accelerate economic transformation and help Africa “escape the colonial legacy.” They stress, however, that “the devil is in the implementation” and recommend a bottom-up approach that focuses on national problems that require cross-border solutions such as shared water resources, regional energy markets, and highways. 

Equity. It will be crucial to understand who gains and who loses from the pact. For example, smallholder farmers may lose if there is a focus on large-scale cash-crop farming, which could lead to greater food insecurity and poor nutrition.

The poverty and social impacts, therefore, need to be tracked across sectors and those who are negatively affected are protected until extractive patterns of trade are replaced by robust value chains, value addition, increased interregional integration, greater investment, creating more jobs, and increased income. 

Infrastructure. One of the key factors retarding industrialization has been the insufficient stock of productive infrastructure in power, water, and transport services that would allow firms to thrive in industries with strong comparative advantages. According to the African Development Bank, Africa’s infrastructure needs are substantial at $130-170 billion a year, with a financing gap between $68-108 billion, driving most countries’ trade outward rather than inward. 

Trade integration across the African continent has long been limited by outdated border and transport infrastructure and a patchwork of differing regulations across dozens of markets. Governments have often erected trade barriers to defend their markets from the regional competition, making it more expensive for countries to trade with near neighbors than countries much further afield.

Intra-African exports were 16.6 percent of total exports in 2017, compared with 68.1 percent in Europe, 59.4 percent in Asia, 55 percent in America, and seven percent in Oceania, according to UNCTAD. Intra-African trade, defined as the average of intra-African exports and imports, was around two percent during the period 2015-17. The share of exports from Africa to the rest of the world ranged from 80 percent to 90 percent in 2000-17 – only Oceania had a higher export dependence on the rest of the world in that period.

The World Bank estimates that by 2035, real income gains from full implementation of the agreement could be seven percent, or nearly $450 billion. By 2035, the volume of total exports would increase by almost 29 percent relative to business as usual. Intra-continental exports would increase by more than 81 percent, while exports to non-African countries would rise by 19 percent.

The bank predicts that the agreement could contribute to lifting an additional 30 million people from extreme poverty and 68 million people from moderate poverty. Yet the impact across countries will not be uniform. The World Bank says that at the very high end, countries like Cote d’Ivoire and Zimbabwe could see income gains of 14 percent each. At the low end, some – such as Madagascar, Malawi, and Mozambique – would see real income gains of only around two percent.

According to the analysis by the World Bank, in the policy areas already covered by sub-regional preferential trade areas (PTAs), such as the Common Market for East and South Africa (COMESA), the East African Community (EAC), the Economic Community of West African States (ECOWAS), and the South African Development Community (SADC), the AfCFTA will offer a common regulatory framework, reducing market fragmentation created by different sets of rules. Secondly, the AfCFTA will be an opportunity to regulate policy areas important for economic integration that are often regulated in trade agreements but that so far have not been covered in most of Africa’s PTAs, which the bank says “tend to be shallow.”

Policymakers say that the free movement of labor will be a key contributor to the successful functioning of the free trade area, but not all African countries are committed to the concept. With some countries harboring strong Xenophobic problems that need to be addressed before the agreement can be fully engaged.

Alongside the signing of the AfCFTA agreement and the supporting Kigali Declaration, 30 African nations signed the Protocol on Free Movement of Persons which seeks to establish a visa-free zone within the AfCFTA countries. However, major AfCFTA signatories Nigeria and South Africa have not signed the Protocol, and the political will to do so is lacking.

Negotiations are underway to eliminate tariffs on 90 percent of goods over a five-year period (10 years for least developed countries, or LDCs). An additional seven percent of tariff lines are deemed “sensitive”. Tariffs on these goods will be eliminated over a 10-year period (13 years for LDCs). A remaining threepercent of tariff lines can be excluded from liberalization, but the value of these goods cannot exceed 10 percent of total intra-African imports.

Negotiations on rules of origin have proved a sticking point: “While some countries are arguing for stringent rules of origin to ensure that preference accrues only to members and is not deflected to non-members, others – generally the least developed countries with weaker productive capacities – advocate more flexible, pro-developmental rules that allow them to source inputs from the cheapest and most competitive locations,” explains Hippolyte Fofack in a recent article for the Journal of African Trade.

In an interview with French daily Le Monde in January 2021, African economist Carlos Lopes underlined the potential that the AfCFTA gives Africa to speak with one voice in trade negotiations. He mentioned that Europe has 13 types of trade agreements with Africa, each of which Europe defends firmly. “Europe needs to understand the direction Africa is going in with the setting up of the AfCFTA… “We Africans must be more united to defend our own interests,” he further explained. His comments echo those of Gyude Moore, senior policy fellow at the Center for Global Development, in the December 2020 issue of African Business: “This is an African project that will require African commitment to succeed.” It must proceed regardless of what happens elsewhere. We can expect external actors to continue to pursue policies that run counter to Africa’s objectives as long as such policies benefit them. Even as we have made clear our intent to move trade along a multilateral track, Africa’s largest partners may seek to pursue a bilateral one. “Despite the rhetoric of Africa’s external partners, the continent’s prosperity has never been the true objective of their policies, and we cannot expect that to change now.”

The authors of the AfCFTA’s 2021 Futures Report wrote “The AfCFTA is much more than a trade agreement. It should be seen as an instrument for Africa’s development. By driving the continent’s integration, the AfCFTA will result in wider and deeper RVCs [regional value chains], thereby laying the foundations for a “Made in Africa Revolution.”

As African economies seek to move away from being suppliers of raw materials to the rest of the world and towards trading more value-added products with each other, developing RVCs will enable countries to combine their comparative and competitive advantages to participate in industries from which they would otherwise be excluded. 

“The ability of the AfCFTA to drive this transformation in Africa is partly dependent on the successful transition from current inward-looking approaches to trade and investment towards the strengthening of RVCs where different segments of the industry’s VCs are located across the region reflecting local comparative advantage,” say the authors of AfCFTA’s 2021 Futures Report wrote. 

Applying a methodological assessment of the tariff and services offers that have been exchanged amongst AfCFTA state parties, the report identifies 10 value chains where new opportunities can be maximized: Automotive; Leather and Leather Products, Cocoa; Soya; Textiles and Apparel; Pharmaceuticals; Vaccine Manufacturing; Lithium-Ion Batteries; Mobile Financial Services; and Cultural and Creative Industries.

The report aims to help governments target sectors that can benefit from their country’s entry into the AfCFTA and market players to better understand where they should invest. It also offers views from industry players running exporting enterprises in some of the value chains identified, all in the service of creating a Made in Africa revolution.

Tsitsi Mutendi is a co-founder of African Family Firms, an organization that aims to facilitate the continuity of African family businesses across generations. She is also the lead consultant at Nhaka Legacy Planning and the host of the Enterprising Families Podcast.

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