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Why does the African Continental Free Trade Area matter?

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The African Continental Free Trade Area Agreement (AfCFTA) will make it a lot easier to trade and do business across borders in Africa. Image credit: WhyAfrica

05 April 2021 – The African Continental Free Trade Area (AfCFTA) could be an exciting gamechanger for the people of Africa and for companies doing business in Africa. But what does AfCFTA mean for a business in Africa, and why does it matter?    

Currently, Africa accounts for just 2% of global trade. And only 17% of African exports are intra-continental, compared with 59% for Asia and 68% for Europe. The potential for transformation across Africa is therefore significant. AfCFTA will create the largest free trade area in the world measured by the number of countries participating. Connecting 1.3 billion people across 55 countries with a combined gross domestic product (GDP) valued at USD3.4-trillion, the pact comes at a time when much of the world is turning away from cooperation and free trade.

According to the World Economic Forum (WEF), the agreement aims to reduce all trade costs and enable Africa to integrate further into global supply chains – it will eliminate 90% of tariffs, focus on outstanding non-tariff barriers, and create a single market with free movement of goods and services. Cutting red tape and simplifying customs procedures will bring significant income gains. Beyond trade, the pact also addresses the movement of persons and labour, competition, investment, and intellectual property.

How will the African business community benefit?

The African business community will benefit significantly. According to a report titled: “A business guide to the African Continental Free Trade Area Agreement” by the International Trade Centre, the African business community is a key beneficiary of the agreement.

The following is an extract from the report: “Potential advantages to the private sector include increasing economies of scale and access to cheaper raw materials and intermediate inputs; better conditions for regional value chains and integration into global value chains; catalysing the transformation of African economies towards greater utilisation of technology and knowledge; facilitating both intra-African and external direct capital flows to African countries, and creating a labour market and a demand pull throughout the continent.

“To ensure that the private sector can benefit from the African Free Trade Area, it is important that business understands what the AfCFTA and future negotiations will cover. Business should ensure its voice is heard as governments craft and operationalise the agreement. To do that, they need to be fully aware of the issues, potential benefits and opportunities and, most importantly, the role they can play.

Implementation will lead to no tariffs.

“Implementation of the AfCFTA Agreement will lead to the removal of tariff restrictions on intra-African trade, address some of the non-tariff barriers that have restricted trade between AU Member States and make it easy to situate industrial production in different countries within Africa (Kaberuka, 2018; Ogunyemi, 2017; Alli, 2018).

“In addition to increasing industrial production, it is expected that there will be substantial increase in intra-African trade in agriculture, which should lead to improvements in real wages and employment (UN Office of Human Rights Commissioner, 2015). The Agreement will rationalise trade between the different RECs and provide for coherence in terms of Africa’s trade with the rest of the world (Ismail, 2016; Saygili, Peters and Knebel, 2018; Regions Refocus and Third World Network, 2016; Mureverwi, 2016; Apiko and Aggad, 2018; Quiles, 2016). Freer trade within Africa will lead to increased competition, innovation, and prosperity for Africa’s people in the long run (Gobena, 2016). The target market for the AfCFTA is estimated to constitute 1.27 billion people, projected to rise to 1.7 billion by 2030, out of which about 600 million people will be middle class (Bramdeo, 2018).

“In terms of aggregate GDP, this will range from USD2.1-trillion to USD3.4-trillion or USD6.7-trillion at Purchasing Power Parity terms. Aggregate private and business-to-business consumption is expected to constitute USD4-trillion, and in addition to the growth of intra-African trade by 52.3%, global trade is projected to grow to 6% by 2022 (Ibid.).

“In terms of investments and consumer spending, the AfCFTA is expected to attract an estimated USD4-trillion (Azikiwe, 2018). Other potential benefits to business include permitting producers to benefit from economies of scale, to access cheaper raw materials and intermediate inputs; improve the conditions for regional value chains and enhance the potential for integration with global value chains; catalyse the transformation of African economies towards greater utilisation of technology and knowledge; and facilitate both intra-African and external direct capital flows to African countries (Saygili, Petrs and Knebel, 2018).

Source: A business guide to the African Continental Free Trade Area Agreement by the International Trade Centre

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