Continental free trade agreement bodes well for future of trade policy across Africa
Acfta aims to harmonise rules between overlapping regional economic communities
On March 21 2018, 44 African countries signed the African Union’s continental free trade agreement (Acfta). The AU aims to use the agreement as a conduit for the creation of a single market and customs union on the continent, akin to the trade blocs established by the EU.
The first step, however, will be to remove tariff barriers on 90% of goods traded between Acfta signatories.
The creation of Acfta is significant because it aims to harmonise rules between overlapping regional economic communities that emerged in the 1980s. It is also a positive development because it will likely reverse the trend of increased protectionism that swept across commodity exporting markets after the oil price crash of 2014.
Trade across borders in Africa has presented challenges for decades, partly because patterns of trade reflect those established during colonial periods, namely to facilitate the export of commodities to Europe.
For example, the UN conference on trade and development (Unctad) estimates that about 80% of international trade conducted by African states takes place with non-African markets. Furthermore, trade that does take place between African countries is heavily regionalised.
Unctad also estimates that more than 80% of intra-African trade occurs within regional economic communities, for example between members of the Southern African Development Community (Sadc), or between members of the Economic Community of West African States (Ecowas). Consequently, just 4% of trade conducted by African states takes place with another African country that is not within the same region.
While this illustrates the low levels of intra-African trade, it provides a promising outlook for the impact Acfta — once fully implemented — could have on bilateral trade within Africa.
What does it mean for multinational corporations? Full implementation of Acfta would result in improved operating conditions for companies trading between African countries. For example, the lowering of trade barriers would create new options for organising supply chains, potentially opening up new and more cost-efficient routes to supply customers. Companies will also benefit from the formalisation of cross-border trade.
Currently, large portions of cross-border trade in Africa are informal (that is, illegal) because customs controls are inefficient and highly bureaucratic. Therefore, increased efficiency for goods being formally traded across borders would reduce the competitive threat posed by parallel and illicit imports that currently undermine sales for companies in many markets.
However, not all industries (or countries) are expected to benefit equally from Acfta, partly because it has been designed with the aim of stimulating Africa’s industrial development, and to a lesser extent raising agricultural productivity. Consequently, benefits from Acfta would flow most directly to countries with the largest manufacturing bases, notably SA, Egypt, Morocco, Nigeria, and Kenya. While this would stimulate economic activity in these markets — and therefore raise employment and demand for companies’ products — competitive pressures from African companies would likely intensify.
In practice, however, even if Acfta is fully implemented, infrastructure constraints will still pose a significant barrier to cross-border trade for businesses. Congestion at ports, foreign currency shortages, weak domestic transport infrastructure and sclerotic bureaucracy will also prevent the full benefits of Acfta from being realised.
How likely is it that Acfta will be implemented? It will only come into force once 22 countries ratify it. This presents a problem because uptake has been mixed. Countries such as Rwanda have championed the agreement, but it has received a lukewarm reception from the continent’s two economic power houses: SA is yet to sign and Nigeria has signed but not ratified it. Without the backing of these two countries, the effect of Acfta on economic growth, and the potential benefits for businesses, will be curtailed.
Furthermore, even once it is ratified by 22 countries there will be additional hurdles to overcome before the agreement becomes fully effective. Creating an effective enforcement mechanism — for example a body that functions like the European Court of Justice, which settles disputes between members of the EU’s single market — will be crucial to ensure multilateral adherence to the removal of tariff and nontariff barriers. Furthermore, the harmonisation of regulations and standards across the continent will likely take many years to complete because of domestic political opposition within countries.
In addition, the creation of a common foreign trade policy — another aim of Acfta — will be difficult to establish. Therefore, while the agreement bodes well for the future of trade policy across Africa, companies should not expect a significant reduction in barriers to cross-border trade for the next several years.
• Kindinger is senior analyst for sub-Saharan Africa at Washington DC-based Frontier Strategy Group.