Key Takeaway
The new African Continental Free Trade Agreement could mean a significant boost to participating economies and producers in the African Union. Companies on the continent, as well as those reliant on trade with African Union countries, should be looking out at the impact of this new free trade area.
Leaders of the African Union came together on March 21st in Kigali, Rwanda, to discuss a significant milestone for the continent’s economy. The African Continental Free Trade Agreement (AfCFTA) will bring together the 55 member states in tariff-free trade, marking the beginning of what many believe will improve intra-African trade, diversify traditional commodity exports and offer a boost to member economies.
Traditionally, the majority of goods produced in Africa are traded with Europe, Asia and the US, with intra-African trade representing only 10% across the continent. While Rwandan President Paul Kagame assured this will not lead to less trade with the rest of the world, the new deal will mark the largest free trade area since the WTO and encourage greater exchange within the continent.
A study by the United Nations predicts the deal will lead to long-term welfare gains of $16.1 billion, after $4.1 billion in tariff revenue losses. It warned, however, that this may not be distributed evenly across the continent. Meanwhile, according to Al Jazeera, the UN Economic Commission for Africa (UNECA) has estimated the agreement could increase intra-African trade by 52% by 2022, compared to 2010.
According to a report from the African Economic Outlook, timing for the agreement falls in line with changes already trending. Africa’s GDP and its internal trade expanded fourfold over the past 20 years, suggesting intra-African trade is more resilient than exchanges with other regions of the world.
“From 2007 to 2015, the continent’s light manufactured goods imports tripled to reach US $260 billion,” the report states. “Africa’s prospects for greater regional trade are also highlighted by its consumer market of nearly one billion people, the rising number of affluent consumers and the increasing mobility of investment capital.”
However, not all are on board. Nigerian President Muhammadu Buhari and Ugandan President Yoweri Museveni were not present at the meeting, and continue to hold reservations. As well, some fear increased competition will lead to job loss. As it stands, the communication and transportation infrastructure connecting African nations will need significant improvement to handle higher volumes of trade. As well, production facilities and capabilities on the continent will need to be improved to move beyond commodity export. Those opposed to the agreement feel the continent is not yet ready.
AfCFTA: what is the Outside Insight we can glean?
Political and social changes like this one have a major impact on the way companies on the continent as well as international companies that trade with African nations will do business moving forward. Those used to low cost imports from Africa, for instance, may soon find themselves in a competitive environment as doors open to business with more nations.
According to David Luke, coordinator of the African Trade Policy Centre at UNECA, the free trade area intends to correct a “historical anomaly”. “Colonialism created a situation where neighbours stopped trading with each other. The main trading route was between African countries and European countries and between African countries and the US,” he told Al Jazeera.
He spoke about the focus on exporting commodities, which tends to be capital- rather than labour-intensive. As a result, this impacts potential job creation, and ultimately to more and more Africans leaving the continent for the promise of greater opportunities.
When you have this kind of economy, your young people cannot find jobs. And when they cannot find jobs, you see them trying to get to Europe and drowning in the Mediterranean.
Major policy changes, legal reforms and trade incentives often have a rippling impact across the world. Globalization has created a greater connection between nations, but the resulting competition also impacts volatile economies like those in Africa that continue to depend on commodity exports. Will an increase in intra-African trade be the move that offers the continent stability and growth in the coming years?