Opportunity beckons as AfCTFA’s go-live date approaches
The African Continental Free Trade Area’s kicks into motion on July 1, 2020 and Europe stands to benefit much if it invests in its former colony
AU member states took a major step in 2018 to boost regional trade and economic integration by establishing the African Continental Free Trade Area (AfCFTA). The agreement, which came into effect on May 30 2019, could be a game-changer for Africa and multinational groups wanting to do business with a consumer market of 1.2-billion people and total GDP of $2.5-trillion.
AfCFTA present a rare opportunity to diversify Africa’s exports and for European companies to capitalise on the new business and growth opportunities it will create. It is the most significant step yet seen towards expanding intra-Africa trade across regional economic communities, enhancing competitiveness between African economies and making Africa a more attractive location for global financial institutions, asset managers and private equity investment.
Intra-Africa trade is a measure of how integrated African economies are. It remained in the low teens for much of the past decade, but edged up to about 17%. A key focus of phase one (trade of goods and services) of the AfCFTA will be on applying zero tariffs on 90% of goods and services traded and reducing nontariff barriers. Successful implementation of phase one is expected to grow intra-Africa trade about 50% by the mid-2020s, ensuring that an increasing proportion of Africa’s trade is within the continent and creating opportunities for industrial growth and the building of new factories to meet demand.
With a GDP that is at $2.2-trillion, or $6.3-trillion in purchasing power parity terms, successful implementation of the AfCFTA will also generate an opportunity for multinational corporations to grow and diversify Africa’s export base. Of the 17% of total trade that is intra-Africa at present, SA accounts for 34%, followed by Nigeria (9%), Egypt (6%), Ivory Coast (4%) and Zimbabwe (4%). SA also accounts for 20% of intra-Africa imports.
In addition to trade finance, the AfCFTA is set to be a catalyst for structural transformation across the continent. Reduction of nontariff barriers, application of zero tariffs and increased integration will lead to more factories being built across the continent as industries develop. This growth will require more international investment in power generation, transport and communications infrastructure.
Despite its clear benefits, key steps will have to be taken over the next few months to implement the AfCFTA by the set “go live” date of July 1 2020.
While 54 of Africa’s 55 countries have signed the agreement, only 28 by recent count have ratified the agreement through their parliaments. Practical implementation of AfCFTA does not become possible immediately on ratification: tariff schedules and service sector commitments (which will form part of the protocols on trade in goods and trade in services respectively) are still being negotiated.
To achieve diversification and the spread of the economic benefit across African countries, removal of nontariff barriers will be critical. Successful implementation of zero tariffs for 90% of goods and services traded intra-Africa, and specifically the removal of nontariff barriers, should diversify the economic benefits to African economies that may naturally have lower labour costs, compared with the likes of SA and other more developed African economies.
While elimination of tariffs could over time substantially increase intra-African trade, the benefits of freer trade will not materialise unless accompanied by procedures and rules to remove Africa’s numerous nontariff barriers. These include a wide range of restrictive practices that make trade difficult, inefficient and costly, such as customs-clearance delays, restrictive licensing processes, certification challenges, uncoordinated transport-related regulations and corruption.
However, while the countries still have to agree on the schedule of goods and services for zero tariffs, what is encouraging is that many African countries already trade under free-trade areas in their economic regional communities, such as Sadc, Ecowas and the EAC. While there are still lots of dependencies, we’re certainly seeing more positives than negatives on the journey to July 1, 2020.
Growth in intra-Africa trade as a result of the AfCFTA will eventually generate significant opportunity for corporations looking to operate in and strengthen Europe-Africa trade, infrastructure and investment ties.
The formation of AfCFTA is a bold vote of confidence in the value of international economic integration with trade conflicts around the world rife, trade barriers rising and the future of the World Trade Organization (WTO) under threat. It is all the more striking because African countries have often remained on the periphery of global trade liberalisation initiatives in the past.
With the level of strong commitment AU member states have shown, now is the time for European companies to step into the world's most vibrant continent.
• Hlungwane is Absa Group regional head of trade & working capital.