AfCFTA: Potentially costly at first, but promising great rewards
Challenges abound for African Continental Free Trade Area implementation, but early achievements bode well for success.
Although Africa is home to 17.9% of the world's population, it has only 3% of its gross domestic product (GDP) and 2.5% of its exports, which consist mainly of primary goods. Consequently, the continent has yet to maximise the potential gains of globalisation. To open trade, the African Union (AU) announced its intention to introduce the African Continental Free Trade Area (AfCFTA) in 2012.
Aligned with AU Agenda 2063, AfCFTA will use trade policies to craft a single continental market and promote industrial development as an engine of growth and sustainable development to achieve the ‘Africa we want’. Following a series of engagements between the AU Commission and member states from 2012 to 2018, the agreement was opened for signatures on 21 March 2018. With ratification by 24 member states, AfCFTA came into force on 30 May 2019. To advance its implementation, the AU made the acceleration of the AfCFTA its 2023 theme of the year.
Priorities and benefits
Africa is heavily reliant on trade with the rest of the world, with exports skewed towards a few primary goods. Manufacturing exports are also centred around resource-based goods subject to volatile global prices. As a result, Africa’s contribution to global value chains is largely upstream production, characterised by the supply of primary goods. This overreliance has, over time, made the continent vulnerable to external demand and supply fluctuations, with enormous implications for development and poverty-reduction efforts. By fostering intra-African trade and regional value chains, AfCFTA will be a crucial driver in Africa’s structural transformation and industrialisation, which could alleviate vulnerability to external shocks, enhance export diversification and boost economic performance.
With regional value chains being developed under AfCFTA, member states can enhance global competitiveness, pursue export diversification and increase exports of high-value-added manufactured goods. This could help African countries to lower imports and dependency on goods that could, in turn, be produced and traded within the continent. This has an important knock-on effect on the balance-of-trade status of states.
The AfCFTA agreement prioritises industrialisation of the agri-business, automotive, pharmaceuticals, transport and logistics sectors based on the potential for import substitution and existing production capacities. These sectors have a higher potential for bolstering local value addition, job creation and economic growth, which will accelerate poverty reduction.
To advance implementation the AU made AfCFTA its 2023 theme, guiding the year’s activities
The agreement expects participating member states to eliminate restrictive measures hindering cross-border supply, consumption abroad, commercial presence and temporary movement of persons. States agreed to start with five priority sectors: business, communication, financial, transport and tourism services. Sectors to be liberalised later include construction and related engineering, distribution, education, environment, and health and social services.
With these priorities and associated benefits, the agreement presents a unique opportunity for Africa to realise its long-held vision of an integrated, continent-wide market. It will also transform economies and substantially raise Africa’s share of global trade to position the region as a dynamic international force. Previous research by the World Bank suggests that AfCFTA could double intra-African trade by 2035, increase foreign direct investment by 111% to 159% and elevate GDP by 1.4% to 2.7%. Real income could rise by 7% to 9% by 2035, reducing the number of people living in extreme poverty to 45 million.
Implementation challenges
African countries vary in size, level of development and diversification of economic activities. As of 2022, for instance, Comoros, Cabo Verde, São Tomé and Principe and Seychelles had populations of fewer than a million, while those of Nigeria, Ethiopia and Egypt were over 100 million. Similarly, certain states have much larger economies than others. Nigeria, South Africa and Egypt boast GDPs exceeding US$300 billion, while those of Gambia, South Sudan, Seychelles, Guinea Bissau, Comoros and São Tomé and Principe are below US$2 billion.
Experience elsewhere, notably Europe, suggests that inclusion of states in different development stages tends to benefit those more advanced, with the weaker ones falling further behind in the short- to medium term. As with any other free trade agreement, therefore, AfCFTA does not necessarily guarantee immediate improvement of all states’ welfare. It may at first come at a cost to some states. It could, for example, bring additional competition to domestic markets, leading to firm closures and possibly higher unemployment rates as initial investments shift to more competitive economies. Thus, AfCFTA is likely to create winners and losers, making the heterogeneity of African countries a major hindrance to engagement and cooperation in implementation.
AfCFTA could incur substantial costs at first, particularly for less-developed countries
As with any free trade agreement, AfCFTA could incur costs initially, particularly for less-developed countries. As tariff revenues drop, industrial sectors are disarranged, value chains reorganised and employment dislocated. Revenue losses, higher income inequality and greater unemployment may ensue, especially if trade openness is not accompanied by measures to enable employees to grasp new opportunities emerging elsewhere.
Appreciating these dynamics, not all member states are committed to free movement of labour. As of January 2023, only Rwanda, Niger, São Tomé and Principe and Mali had ratified the AfCFTA protocol on the free movement of people.
Tariff concessions also remain a sensitive issue because trade tariff revenue generates considerable revenue for most African economies and reductions to government fiscal revenue are expected. For instance, countries such as Central Africa Republic, Chad, Comoros and Democratic Republic of Congo are said to depend on intra-continent tariff revenues for more than 5% of their government revenues. As of January 2023, therefore, although most African countries (45) had submitted provisional schedules of tariff concessions, some, including Djibouti, Libya, Mozambique, Somalia, the Saharawi Republic and Sudan, are still to do so.
Efforts and achievements in 2023
Achievements include the adjustment fund launched in March 2023 to compensate for revenue losses. The fund is expected to support the private sector in adapting to the new AfCFTA trade environment.
Emerging issues, however, include clarifying the national origin of products and establishing the thresholds for local content or value-add before an item is re-exported. The second and third extraordinary meetings and 12th meeting of the AfCFTA Council of Ministers in December 2023 agreed to specific tariff lines as long as non-originating materials used do not exceed 60%. This rule will ensure that AfCFTA preferences are granted to large and significant industrial activities to attract more investment. The council agreed to ban trade in second-hand goods.
The Guided Trade Initiative brought in states meeting trade requirements and associated enterprises
AfCFTA trade started under the Guided Trade Initiative, which brought in member countries that meet minimum requirements for trade and their private sector/state enterprises to capitalise on free trade. In 2023, the scope of the initiative increased, with 35 member countries representing five regions and islands participating in AfCFTA.
At the 17th extraordinary session of the AfCFTA Council of Ministers in November 2022, it was agreed to conclude negotiations on protocols for digital trade and women and youth by July 2023. Despite delay, negotiations on these protocols were completed and adopted at the AU Assembly meeting of February 2024.
Theme of the year
Declaring 2023 ‘The year of AfCFTA: acceleration of African Continental Free Trade Area implementation’ was a milestone. The theme reflected greater political commitment to advancing AfCFTA and achieving the aspirations and goals of Agenda 2063. Theme-linked activities enhanced stakeholder collaboration in the pursuit of, particularly, intra-trade in value-added products and trade across all sectors of Africa’s economy. These stakeholders included member states, regional economic communities, AU institutions, the private sector and development partners.
For smooth AfCFTA implementation, the AU must strive for solutions to rules-of-origin challenges, tariff-reduction concerns and matters related to the treatment of sensitive products. Implementation is, after all, AfCFTA’s most demanding chapter.
