New African Continental Free Trade Area is potential $2.5 trillion target market

Tue 15 May 2018
Posted by: William Barns-Graham

africa trade

Article by: Tate's Export Guide (corporate members)

In March the Rwanda conference of 44 African heads of state produced a framework for trade unity among 54 African countries. The proposed African Continental Free Trade Area (AfCFTA) would be the world's largest free trade area since the WTO was formed.

The aim is to eliminate tariffs on intra-African trade in a market of 1.2 billion people with a gross domestic product (GDP) of $2.5 trillion. If the tariff-removing objectives are met the organisers claim they could boost intra-African trade by 53.2 percent. 

The trade dividend will come from the removal of non-tariff barriers too, such as customs procedures and excessive paperwork, through the imposition of technical and sanitary standards, transit facilitation and customs cooperation.

AfCFTA creates a customs union and a single continental market for goods and services. There is free movement of capital and business travellers, but not people.

Its main achievement could be to integrate the various regional economic communities (RECs) that exist across the continent. Many African countries belong to multiple RECs, which tends to limit the efficiency and effectiveness of these organisations. Ultimately, the aim is continental integration and unification.

Most RECs underperform thanks to a low level of compliance by member states, which has delayed successful integration. Only the East African Community and the Economic Community of West African States have neared sub-regional economic integration.

What will AfCFTA do for African nations?

One of its central goals is to boost African economies by harmonising trade liberalisation across sub-regions and at the continental level. As a part of the AfCFTA, countries have committed to remove tariffs on 90 percent of goods. According to the U.N. Economic Commission on Africa, intra-African trade is likely to increase by 52.3 percent under the AfCFTA and will double upon the further removal of non-tariff barriers.

This could stimulate each country’s industrial development. Some analysts predict that by 2030, Africa may emerge as a $2.5 trillion potential market for household consumption and $4.2 trillion for business-to-business consumption.

Who stands to gain the most? African nations with large manufacturing bases, such as South Africa, Kenya and Egypt, would receive the most rapid benefits.

Only 44 countries have signed the AfCFTA’s establishing framework to date and just 30 signed the Free Movement Protocol. The latter is essential for the free movement of people, right of residence and right of establishment.

Nigeria, with one of the largest economies in Africa, is the most significant non-signatory to AfCFTA. President Muhammadu Buhari claimed he needs more time to consult with unions and businesses to assess the risks an open market would pose to his country’s manufacturing and small-business sector.

The prospect of a continent-wide market eventually may persuade Buhari to overcome his caution and commit Nigeria to AfCFTA.

Another challenge is diversity. The AfCFTA brings together national and regional actors with trade interests that will diverge at times. The challenge will be to maintain universal benefits and compliance.

The diversity of African economies, in their size and the nature of their industrial maturity, adds to the complexity. There are other compatibility problems, such as the existence of numerous bilateral trade agreements that countries already have with the rest of the world. There are also overlapping REC memberships and varying degrees of openness.

The Next Steps

Some countries say the time frame may be too short, especially given the need for debate and negotiations within each signatory nation. One of the most important, South Africa, is yet to sign but considering it.

Countries and RECs still have to complete negotiations on competition, dispute-resolution mechanisms, intellectual property rights and investments, among other issues. They should also agree on regulatory frameworks for service-trade liberalisation (to facilitate market access), submit tariff concessions schedules for trade in goods (specifying the timeline and nature of products that will be liberalised) and make progress in signing of the free-movement protocol.

The final critical steps for the African Union will be to persuade the remaining countries to join, to create a secretariat to coordinate the implementation and to provide enough resources to ensure the AfCFTA’s success.

Can it work? Exporters should get themselves in position because this has enormous potential, says Tusha Shar, owner of Hull-based Integrated Power Solutions, supplies diesel generators to Africa.

According to Shar, British engineering is well respected in African nations and former colonies, but he warns that the competitive advantage is being eroded as China stakes a claim to the regions. Nevertheless, AfCFTA offers a significant opportunity for British exporters in the years ahead. It will take many years to reap the full benefits of an open market free of tariffs and restrictions practices, but companies should not stand on ceremony.

In the meantime, exporters should target the more developed nations in Africa with efficient ports. Shar targets West African nations, such as Nigeria and Ghana, as well as Kenya in the East. Each has a port that can be a gateway to landlocked, less developed nations. But therein lies the problem that needs to be addressed by AfCTFA. There are restrictions on movement inland to nations such as Eritrea, which make trade unprofitable. If non-tariff barriers can be removed - and the richer nations will be a priority for action - these will become strategically important bridgeheads into landlocked central African countries whose fortunes will benefit from market liberalisation.

“We sell to West Africa in particular but there are blockages now when you want to move goods across from Nigeria to Ghana. There is free movement but it could be better,” says Shar, “There is massive bureaucracy getting customs clearance for moving goods from a port on a coastal nation to a landlocked destination like Zimbabwe or Eritrea.”

Countries in central Africa are neither rich nor resourceful, says Shar, but he thinks neighbours could emerge as increasingly significant gateways which will bring economic benefits and knowhow.

Egypt, he predicts, will become an increasingly important bridgehead between Africa and the Middle East.

As one set of barriers is lifted, another may be put in place, Shar fears. “Africa is definitely the next big growth market but China is in place before us. In some cases, the Chinese can veto what comes in. For example, we used to supply Solar panels to one country but a Chinese contractor was the primary source. Once we’d provided the designs, suddenly all their future orders were put through China,” says Shar.

Still the positives are that British engineering is widely respected across the region. “Our products are in demand but if you are dealing in single digit margins in can be very risky. A single bad order can set you back two years,” says Shar.

Africa will be a huge market for fisheries too, says Shar. But it all depends on whether liberalisation can take place. “Even getting letters of credit is very difficult at the moment,” says Shar.

Tate’s Export Guide will bring you regular updates on the changes in customs procedures.