On 21 March 2018, 44 African Union (AU) member states signed the Agreement Establishing the African Continental Free Trade Area (AfCFTA) along with three protocols covering trade in goods, trade in services and dispute settlement. The launch of the AfCFTA is a major milestone in Africa’s integration process and a flagship project under the AU’s Agenda 2063, Agenda 2063: The Africa We Want, which sets out the priority areas for Africa’s development over the next fifty years. At a time of integration fatigue in some parts of the world, including the European Union (EU), and protectionist tendencies across the Atlantic, African countries are forging ahead and have launched the world’s largest free trade agreement (FTA) by the number of contracting parties
The AfCFTA follows short on the heels of another major achievement in African integration, the Tripartite FTA (TFTA). The TFTA, launched in June 2015, links 26 countries from Cape Town to Cairo through their membership of three Regional Economic Communities (RECs), namely the Common Market for Eastern and Southern Africa (COMESA), the East African Community (EAC) and the Southern African Development Community (SADC).
The decision to launch the TFTA, fast-track the AfCFTA and improve connectivity and mobility of African citizens reflect a renewed political consensus among African leaders on the importance of deeper integration to achieve growth, development and poverty reduction. This major agreement is important for several reasons.
First, with African countries increasingly focused on achieving the Sustainable Development Goals (SDGs), the effective implementation of the AfCFTA could potentially place the continent onto a new development trajectory. If implemented by all the AU member states, the AfCFTA will cover a market of 1.2 billion people and a gross domestic product (GDP) of US$2.5 trillion. This sizeable market offers enormous opportunities for growing intra-African trade, which was around 20% of Africa’s total trade with the world in 2016. It is estimated that the AfCFTA could increase intra-African trade by around US$35 billion per year by 2022, particularly if complemented by effective operationalisation of the AU’s Action Plan for Boosting Intra-African Trade and other trade facilitation and infrastructure plans at the regional level.
Second, the AfCFTA will progressively eliminate tariffs and tackle non-tariff barriers on intra-African trade, making it easier for African businesses to trade within the continent. The agreement will be implemented over 10 to 15 years and cover around 90 per cent of total product lines. Reducing trade costs for exporters is important, since businesses currently face higher average tariffs (around 6.1 per cent) on intra-regional trade compared with the rest of the world.
Finally, the AfCFTA could provide an important impetus to Africa’s structural transformation – or industrialisation – objectives. Intra-African trade is already more manufacturing-oriented than Africa’s commodity and mineral exports to the rest of the world. Manufacturing represents 67 per cent of intra-African exports compared to 32 per cent of exports to Europe, 18 per cent to the USA and 14 per cent to China. It also has a higher intensity of services components. According to the McKinsey Global Institute, Africa’s households are projected to spend US$2.1 trillion by 2025, offering promising business opportunities in various consumer-facing industries from housing to healthcare and leisure.
Boosting trade competitiveness in Africa requires greater attention to behind-the-border issues such as investment, competition, standards and regulations and the movement of businesspersons. The second phase of the AfCFTA negotiations will develop protocols on investment, competition and intellectual property. Improving trade competitiveness, especially for SMEs, will be important to take advantage of the new market opportunities provided by the AfCFTA.
However, there are also challenges that must be addressed to ensure the AfCFTA’s success. For example, there are concerns around how to balance the costs and benefits of the AfCFTA. Countries such as South Africa and Kenya with larger manufacturing bases and better road networks, railways and ports are most likely to benefit more from the agreement compared to smaller economies. Despite its leading role in driving the AfCFTA negotiations, Nigeria did not participate in the Kigali Summit nor sign the agreement because of the need for further consultations with domestic stakeholders. Presently, seven African countries account for about 60 per cent of total intra-merchandise exports, while the majority account for the remaining 40 per cent. The AU Member States will need to identify possible policy measures or mechanisms to promote a more balanced distribution of the benefits of regional integration.
International development partners, including the EU and its member states, can support and help drive Africa’s integration agenda through trade, investment and aid, especially more targeted and focused Aid for Trade. The EU is already a major donor supporting Africa’s integration process through facilities like the European Investment Bank, the 11th European Development Fund (2014-2020), the EU-Africa Infrastructure Trust Fund and the Economic Partnership Agreement development programmes.
Europe has a vital economic and security interest in a stable and increasingly prosperous Africa. Africa’s population is projected to reach around 2.5 billion people by 2050, presenting promising trade and investment opportunities as the world’s last remaining frontier market, but also raising critical challenges around security and stability. Since the AfCFTA will boost intra-African trade, create jobs and incomes and improve welfare, supporting the implementation of this pan-continental trade deal should be a major priority for the EU and its member states. The EU initially offered capacity support for the AfCFTA negotiations. The focus should now turn to technical support for implementation, including domestic reforms boosting competitiveness and facilitating adjustment, and preparing for the second phase of the AfCFTA negotiations.