What you need to know:
- When African countries trade with themselves, they exchange more manufactured and processed goods, have more knowledge transfer, and create more value.
- The real test of the AfCFTA will be how quickly African countries can quicken export diversification and product complexity and make trade more inclusive.
A united African continent working towards common goals would be a major force on the global economic stage.
And it surely will be, especially after the African Continental Free Trade Area Agreement (AfCFTA), which commits countries to remove tariffs on 90 per cent of goods, progressively liberalises trade in services and addresses a host of other non-tariff barriers.
If successfully implemented, the agreement will create a single African market of over a billion consumers with a total Gross Domestic Product (GDP) of over $3 trillion. This will make Africa the largest free trade area in the world.
The debate on the benefits of trade, however, has dominated this decade, and Africa has cast its vote for more and better trade with itself.
In March last year, African countries signed a landmark trade agreement — one key to unlocking the region’s economic potential, making it easier for Africa’s 55 countries to trade with one another.
Currently, Africa is a makeshift of regulations and tariffs, and trade between countries has been facing challenges as a result.
For example, only about 10 per cent of Nigeria’s annual trade activity is with other African countries.
This is surprising given the country’s dominant economic standing and location firmly in the centre of the continent.
Africa’s intra-continental trade level hovers at just around 20 per cent, while nations in Europe and Asia are at 69 per cent and 59 per cent, respectively.
Clearly, there is a lot of room for growth in Africa.
The good news for the continental agreement is that many of Africa’s largest economies, including Egypt and South Africa, are already on board.
And with Nigeria finally agreeing to sign the continental deal in July, all African countries except Eritrea are now on board.
The challenge now is the preparatory work to make the market operate.
This includes areas such as rules of origin, liberalisation of trade in goods and services, and establishment of digital payments and settlements systems.
We are also developing regional value chains to supply the market and competitively link Africa to global value chains.
The most critical hurdle the continent faces is to bring AfCFTA into operation this year and double intra-African trade by 2022 once tariff and non-tariff barriers are removed.
We also face the challenge of bringing about win-win outcomes given that the AfCFTA will be a diverse membership of least-developed, landlocked, small-island, and lower- and upper-middle countries, as well as countries in conflict.
Can Africa do better with trade? The share of intra-African exports as a percentage of total African exports has increased from about 10 per cent in 1995 to around 17 per cent in 2017, but it still remains low.
This is therefore an important reason to expect that trade will be a key driver of growth in Africa.
However, Africa’s biggest problems are unemployment and the private sector, which drives the GDP in many nations, and is expected to grow manufacturing, innovation and develop new jobs for the youth.
According to modelling results by the Economic Commission for Africa (ECA), AfCFTA is projected to increase the value of intra-African exports.
The continental agreement will be a game changer for stimulating intra-African trade.
It is projected, through the sole removal of tariffs on goods, to increase the value of intra-African trade by between 15 per cent (or $50 billion) and 25 per cent (or $70 billion) depending on liberalisation efforts by 2040, compared to a situation with no AfCFTA in place.
Alternatively, the share of intra-African trade would increase by nearly 40 per cent to over 50 per cent, depending on the ambition of the liberalisation between the start of the implementation of the reform (2020) and 2040.
Recent evidence by ECA shows that when African countries trade with themselves, they exchange more manufactured and processed goods, have more knowledge transfer, and create more value.
In fact, manufactured goods make up a much higher proportion of regional exports than those leaving the continent at 41.9 per cent, compared to 14.8 per cent in 2014.
The real test of the AfCFTA will be how quickly African countries can quicken export diversification and product complexity and make trade more inclusive.
Trade diversification of exports is however important as it allows countries to build resilience to movements in demand, due to economic downturns in importing countries but also price dips.
The AfCFTA offers potential for agricultural products. In 2015, African countries spent about $63 billion on food imports, largely from outside the continent.
The ECA’s modelling projects that by 2040, the AfCFTA will increase intra-African trade in agricultural products by between 20 and 30 per cent, with the highest gains being in sugar, vegetables, fruit, nuts, beverages, and dairy products.
The agreement is expected to expand access to markets at the regional and international levels, thus generating state revenue, increasing farmer income and expanding both farmer and country capacity to invest in modernising the agricultural sector through processing and mechanisation.
The AfCFTA as a result should stimulate demand for intra-African food imports, supporting a predominantly women-led sector.
Therefore, AfCFTA will be a game changer for stimulating intra-African trade and as Nelson Mandela once said, “It always seems impossible until it is done.”
In that spirit, we all will make the AfCFTA work, build an amazing marketplace and continental brand.
The writer is a member of the Brand Africa board of trustees and Director, East African Business Council