AfCFTA’s $3-trillion trade growth potential hinges on more manufacturing
Factory products constitute on average only 10% of Africa's GDP
If fully implemented, the African Continental Free Trade Area (AfCFTA) will unlock significant but uneven growth opportunities on the continent.
Our research has found that some countries are now better placed than others to reap the rewards of intraregional trade. Countries with good trade integration and open economies are most likely to benefit economically from lower trade tariffs. However, numerous obstacles mean the tangible benefits of the agreement will probably be realised only from 2030.
SA stands to maximise the benefits of AfCFTA due to its existing strong connections across the continent and well-established manufacturing base. The country is next to chair the AU, starting in January 2020, and will be keen to facilitate progress in free trade on the continent under the agreement, especially as it is one of the nations with the greatest opportunities for growth. Smaller economies, such as those of Ghana and Côte d’Ivoire, also stand to benefit from the agreement due to existing favourable conditions — open economies, good infrastructure and supportive business environments.
Our research indicates that to unlock the full $3-trillion in growth potential that free trade will bring, governments and businesses in Africa need to fully support the AfCFTA agreement and prioritise it over the patchwork of regional and competing agreements in Africa.
Regional integration on the continent is largely an unattained goal, despite all the regional economic communities. Overall, these have complex and often conflicting policies and have achieved very different levels of integration.
Despite the challenges, however, some such regional bodies have successfully encouraged effective trade among member countries. For example, Côte d’Ivoire, Kenya, Morocco, Senegal and SA have become regional trading hubs, having leveraged alliances they established through their regional communities. One of the ways forward for African economies to further implement effective intraregional trade may be to draw on the lessons learnt from these.
Africa also ranks behind other continents in terms of its level of regional trade integration. The AfCFTA’s intraregional trade share of 17% compares with 64% for the EU and 50% for the US-Mexico-Canada agreement.
Trade links between Africa and the rest of the world are often stronger than trade between countries on the continent.
African nations now tend to trade more with Europe (35%) and Asia (31%) than with neighbouring markets. Less than a fifth of African countries’ exports are destined for other countries on the continent.
Trade links between Africa and the rest of the world are often stronger than trade between countries on the continent
And while African nations may trade within their respective regional economic communities under preferential terms, trade beyond these agreements is generally subject to most-favoured nation tariffs, which are much higher and act as a disincentive to trade integration.
A report based on research by Baker McKenzie and Oxford Economics, AfCFTA's US$3 trillion Opportunity: Weighing Existing Barriers against Potential Economic Gains, compares Africa’s 20 largest economies in terms of the share of exports destined for other economies on the continent.
Economies such as Uganda's and Zimbabwe's buck the trend, trading more with their neighbours than other African nations. Yet their economies are small in contrast to those of Egypt, Nigeria and SA, which together represent more than half of the continent’s GDP. Egypt and Nigeria, for instance, have very limited trade relationships with their African peers. As major fuel exporters, they are focused on exports outside the continent.
More than three-quarters of African exports to the rest of the world are heavily focused on natural resources, primarily raw materials. In contrast, a look at African imports from outside the continent reveals that manufacturing products, industrial machinery and transport equipment constitute more than 50% of Africa’s combined needs.
Africa’s imports from outside the continent account for more than half of the total volume of imports, the most important suppliers being Europe (35%), China (16%) and the rest of Asia, including India (14%). By contrast, imports from other parts of Africa account for only 16% of total merchandise imports.
Manufacturing GDP represents on average only 10% of GDP in Africa. This means limited production capabilities within Africa are now being compensated for through imports. Yet this manufacturing deficit could be eventually satisfied within the continent and enabled by AfCFTA. This misalignment between what various African countries need and what is produced on the continent signals missed opportunities to reduce imports from outside Africa and increase trade flows within the continent. For AfCFTA to succeed fully, more countries need to diversify their production of goods to better match the import needs of their continental neighbours.
The report also underscores the importance of not only lowering tariff barriers, but also addressing nontariff barriers to intraregional trade.
Some of the most significant obstacles to AfCFTA are inadequate infrastructure, poor trade logistics, onerous regulatory requirements, volatile financial markets, regional conflict and complex and corrupt customs procedures. These can be even more detrimental to trade expansion than tariff measures.
The vast infrastructure gap in Africa, including transport and utilities infrastructure, must be urgently addressed so as not to restrict increased trade integration. Large infrastructure projects that are in the pipeline, such as the Trans-Maghreb Highway in North Africa and the North-South Multimodal Corridor, connecting extensive parts of Southern Africa, as well as the Central Corridor project and the Abidjan-Lagos Corridor Highway project, should help.
AfCFTA is expected to act as an impetus for African governments to address their infrastructure needs as well as to overhaul regulation relating to tariffs, bilateral trade, cross-border initiatives and capital flows.
Both domestic and foreign trade will benefit from reforms to regulation, political climate and trade policies that enhance competitiveness and improve the ease of doing business. It is important to be realistic about time frames, however, as effective solutions will take years given limited financial capacity in many countries, high risks to private financing of infrastructure, political hurdles, administration shortfalls and lack of resources.
While the benefits may not be immediate, the launch of the AfCFTA is a positive step, not just for the African continent but for world trade in general. There are still numerous challenges to be resolved, but if the barriers to its effective implementation can be addressed the next decade will see the growth of AfCFTA into one of the world’s most exciting new global trading zones.
• Hedwall is partner and head of Baker McKenzie’s global international commercial & trade group. Du Plessis is head of Africa and Subban partner specialising in customs and trade at Baker McKenzie Johannesburg.