THE AFRICAN CONTINENTAL FREE TRADE AREA(AfCFTA); BOOSTING INTRA-AFRICAN TRADE AND ECONOMIC DEVELOPMENT

What is (AfCFTA)

The African Continental Free Trade Area (AfCFTA) is a trade area covering most of Africa, established in 2018 by the African Continental Free Trade Agreement. With 43 parties and 11 additional signatories, it is the largest free-trade area by membership after the World Trade Organization, encompassing 1.3 billion people across the continent.

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The agreement, facilitated by the African Union (AU), was signed by 44 of its 55 member states in Kigali, Rwanda on March 21, 2018. It was set to take effect 30 days after ratification by 22 signatory states, which was achieved on April 29, 2019, when the Saharawi Republic submitted its ratification. Consequently, the agreement went into effect on May 30, 2019, entered its operational phase on July 7, 2019, and officially commenced on January 1, 2021. The permanent secretariat overseeing negotiations and implementation is located in Accra, Ghana.

AfCFTA members have committed to eliminating tariffs on most goods and services within 5, 10, or 13 years, depending on their development level or the product type. Long-term goals include creating a single, liberalized market; reducing barriers to capital and labor; facilitating investment; developing regional infrastructure; and establishing a continental customs union. The agreement aims to boost socioeconomic development, reduce poverty, and enhance Africa’s global economic competitiveness.

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A significant milestone was reached on January 13, 2022, with the launch of the Pan-African Payment and Settlement System (PAPSS), enabling transactions in local currencies among African businesses.

• In April 2024, the AU announced AfCFTA’s operational phase, marked by:
• Establishing rules of origin for duty-free trade;
• Implementing 90% tariff liberalization;
• Creating an online system for reporting non-tariff barriers;
• Introducing the Pan-African payment and settlement system to ensure payment certainty and confidence;
• Providing the African Trade Observatory, a portal to address trade obstacles, with data from AU member states.

The African Continental Free Trade Area (AfCFTA) is an ambitious trade agreement aimed at establishing the world’s largest free trade zone, encompassing nearly 1.3 billion people across Africa. Its objective is to enhance economic integration by creating a unified market for goods and services. The potential economic output of this trade area could reach approximately $3.4 trillion. However, realizing its full benefits hinges on substantial policy reforms and trade facilitation measures across the signatory nations.

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The AfCFTA seeks to lower tariffs among member states and addresses various policy areas such as trade facilitation, services, and regulatory standards like sanitary and technical barriers to trade.

The need of AfCFTA in Africa.

Trade integration within Africa has historically faced obstacles due to outdated border infrastructure, inadequate transportation systems, and a complex array of regulatory frameworks across numerous markets.

Governments often imposed trade barriers to shield their domestic markets from regional competition, resulting in higher costs for intra-continental trade compared to trade with distant countries.

According to UNCTAD, intra-African exports accounted for just 16.6% of total exports in 2017, contrasting sharply with Europe (68.1%), Asia (59.4%), America (55%), and Oceania (7%). Intra-African trade, defined as the average of intra-African exports and imports, averaged around 2% between 2015 and 2017.

During the period from 2000 to 2017, Africa’s export dependence on the rest of the world ranged from 80% to 90%, with only Oceania exhibiting a higher export reliance on external markets.

How AfCFTA is boosting Intra-African trade and Economic Development

Enhancing Intra-African Trade

• Tariff Reductions and Elimination

One of the most immediate impacts of AfCFTA is the reduction and eventual elimination of tariffs on a vast majority of goods traded within the continent. The agreement stipulates that 90% of tariffs on goods should be eliminated, with some products designated for immediate liberalization, while others follow a phased approach over 5, 10, or 13 years based on countries’ development statuses. By reducing tariffs, AfCFTA significantly lowers the cost of goods, making African products more competitive within the continent. This tariff liberalization is expected to boost intra-African trade by making it more profitable and appealing for businesses to trade with neighboring countries rather than relying on non-African markets.

• Simplifying Trade Procedures

Beyond tariff reductions, AfCFTA aims to streamline and harmonize customs procedures across member states. Simplified customs processes reduce the time and cost associated with cross-border trade. This harmonization involves the adoption of common standards and regulations, making it easier for businesses to navigate trade requirements across different countries. The establishment of a continental customs union further simplifies these procedures, promoting seamless trade flows. By addressing non-tariff barriers such as differing standards, regulations, and bureaucratic inefficiencies, AfCFTA fosters a more conducive environment for intra-African trade.

• Rules of Origin

The establishment of clear and concise rules of origin is another critical aspect of AfCFTA. Rules of origin determine the criteria under which a product is considered as originating from within the free trade area, thus qualifying for preferential treatment. AfCFTA’s rules of origin are designed to prevent trade deflection, where products from non-member countries are shipped through member states to exploit tariff advantages. Clear rules of origin promote the use of local inputs and manufacturing, thereby boosting local industries and ensuring that the benefits of tariff reductions are enjoyed by genuine African products.

Economic Development

• Industrialization and Value Addition

AfCFTA promotes industrialization and value addition within Africa by encouraging the development of manufacturing and processing industries. By creating a larger market, AfCFTA enables economies of scale, making it more viable for businesses to invest in industrial activities. Local production and value addition not only reduce dependency on imported goods but also create jobs and spur economic growth. The agreement supports the development of regional value chains, where different stages of production are distributed across multiple countries, leveraging each country’s comparative advantage. This regional integration enhances productivity, diversifies economies, and promotes sustainable economic development.

• Job Creation and Poverty Reduction

The economic integration facilitated by AfCFTA is expected to create millions of jobs across the continent. By stimulating industries and encouraging investment in various sectors, AfCFTA generates employment opportunities for a growing African workforce. Increased employment leads to higher incomes and improved living standards, contributing to poverty reduction. The agreement also emphasizes inclusive growth, aiming to ensure that the benefits of economic development are widely shared among all segments of the population, including women, youth, and marginalized communities. By fostering a more equitable economic landscape, AfCFTA supports broader social and economic stability.

• Investment Attraction

AfCFTA enhances Africa’s attractiveness as an investment destination by creating a more predictable and harmonized business environment. Investors are more likely to commit capital to regions where trade policies are stable and transparent. The larger, integrated market created by AfCFTA offers significant opportunities for investors looking to scale their operations. Additionally, the agreement’s focus on reducing trade barriers and improving infrastructure lowers the risks and costs associated with investment. Increased foreign direct investment (FDI) brings in capital, technology, and expertise, further driving economic growth and development.

Predicted Economic Benefits of the AfCFTA?

According to a 2020 report by the World Bank, the full implementation of the agreement by 2035 could yield significant economic benefits, with real income gains estimated at 7%, amounting to nearly $450 billion. By 2035, total exports are projected to increase by almost 29% compared to the baseline scenario. Intra-continental exports would experience a substantial rise of over 81%, while exports to non-African countries would also see a notable increase of 19%.

The World Bank further predicts that the agreement has the potential to lift an additional 30 million people out of extreme poverty and 68 million people out of moderate poverty.

However, the impact of the agreement is expected to vary across countries. At the upper end of the spectrum, countries like Côte d’Ivoire and Zimbabwe could experience income gains of 14% each. Conversely, some countries such as Madagascar, Malawi, and Mozambique might only witness real income gains of around 2%.

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Conclusion

The African Continental Free Trade Area (AfCFTA) represents a transformative initiative aimed at boosting intra-African trade and promoting economic development across the continent. By reducing tariffs, simplifying trade procedures, and enhancing infrastructure, AfCFTA creates a more conducive environment for trade and investment. The agreement’s focus on industrialization, job creation, and poverty reduction supports broader economic development goals. However, addressing non-tariff barriers, building capacity, and ensuring inclusive and sustainable growth are essential for fully realizing AfCFTA’s potential. With strong political will and cooperation among member states, AfCFTA can significantly enhance Africa’s economic integration and development, positioning the continent as a more competitive player in the global economy.