The African Continental Free Trade Area (AfCFTA) is a free trade area encompassing most of Africa. AfCFTA emerged in the late 2010s as a strategic initiative by African Union (AU) member states to foster economic integration and growth through increased intracontinental trade and investment. Its long-term objectives include creating a single, liberalized market; reducing barriers to capital and labour to facilitate investment; developing regional infrastructure; and establishing a continental customs union. The overall aims of AfCFTA are to increase socio-economic development, reduce poverty, and make Africa more competitive in the global economy.
AfCFTA presents a promising outlook for African trade, particularly in manufacturing, with a projected 29% increase in total exports by 2035. Its intracontinental exports are set to surge by over 81%, notably benefiting countries like Cameroon, Egypt, Ghana, Morocco, and Tunisia. Manufacturing exports are expected to gain the most, with a 62% increase, while smaller gains are anticipated in agriculture and services.
It is projected that by 2035, the process of reshaping resource allocation across sectors and countries could elevate the continent’s total production by almost US$212 billion, with the services sector poised to gain the most, followed by manufacturing and natural resources.
Benefits and Journey So Far
Looking ahead, the agreement holds the promise of dynamic economic gains through improved trade facilitation, service trade reform, and collaboration in investment, intellectual property, and competition.
These enhancements could attract investment, stimulate regional and continental value chains, and foster diversification and industrialization across Africa. The Free Trade Area is anticipated to elevate the quality of trade within Africa, facilitating the transformation of commodity-dependent economies into exporters of sophisticated, processed goods.
Despite these positive projections, the impact of AfCFTA varies across countries and sectors, emphasizing the need for strategic considerations. While 90% of countries are expected to witness growth in service volume, the short-term effect on tax revenues appears minimal, with tariff revenues declining by less than 1.5% for most countries. However, the long-term outlook suggests a 3% growth in tariff revenues by 2035, driven by increased imports and measures addressing non-tariff barriers.
Additionally, while the Free Trade Area might impact Africa’s trade with third parties, the overall effect is expected to be limited due to factors such as the limited substitutability of tradable goods and the potential growth of the continent benefiting global demand.
With the launch of the Pan-African Payment and Settlement System (PAPSS) on January 13, 2022, AfCFTA made significant progress toward its goal. This system enables payments between African businesses to be made in any local currency.
Setbacks
A critical hurdle hindering the realization of Africa’s economic potential is insufficient intra-continental trade, and regrettably, African leaders seem to lack the necessary urgency to address this issue.
The incapacity of African countries to fully engage in international trade has prompted the pursuit of regional economic integration, with the AfCFTA aiming to strike a balance between global and intra-African trade for sustainable economic benefits.
Despite the potential to generate an additional $70 billion in income annually for Africa by increasing its share of world trade from two to three per cent, challenges persist. Opening markets, reducing tariffs, and fostering open trade policies within the continent remain formidable tasks for African nations.
Notably, official trade totals often overlook the significant portion of informal cross-border transactions between African countries. These unrecorded and customs-avoidant informal trades contribute to the difficulty in measuring their impact, creating a gap in understanding the true dynamics of intra-African commerce.
The intricacies of distinguishing between formal and informal businesses, particularly in the developing world, further complicate measurement efforts. The informal economy, while providing income or safety nets for the poor, operates independently of the formal economy, making it challenging for states to assess revenues and activities within this sector. Adding to the complexity, the nature of production units in the informal sector deters regular data collection by very few countries worldwide, underscoring the intricate challenges faced by the African Continental Free Trade Agreement.
Possible solutions
Trade impediments loom large over African countries, with higher trade taxes compared to other regions acting as a significant deterrent. The African Continental Free Trade Agreement (AfCFTA) aims to address this by calling for a substantial reduction in tariffs and the promotion of regional integration through increased trade.
However, the challenges extend beyond tariffs, as AfCFTA recognizes the existence of underlying non-tariff trade barriers such as bureaucracy, inadequate infrastructure, technical and conformity assessments, coupled with hidden charges and taxes, which pose potential threats to the agreement’s success.
These multifaceted challenges underscore the need for comprehensive strategies beyond tariff reductions to foster meaningful regional integration and trade growth on the continent.
From AfricaTradeHub’s point of view, the African Continental Free Trade Agreement holds immense potential to reshape African trade dynamics, bolster nations, elevate standards of living, and amplify Africa’s global political influence. Despite historical hindrances, the establishment of the trade area signifies a crucial stride toward enhancing the competitiveness of African resources and products on both regional and global fronts.
However, realizing this potential demands significant concessions and compromises from individual states, particularly concerning concerns over sovereignty and internal affairs. While the transformative impact may take years to fully materialize, the agreement, if diligently implemented, stands as a catalyst for substantial long-term contributions to African development. The journey ahead requires a delicate balance of strategic decisions, cooperation, and perseverance to unlock the promise embedded within the African Continental Free Trade Agreement.
