African Continental Free Trade Agreement (AfCFTA): Benefits and Challenges

Basic Facts About AfCFTA

It was signed in Kigali, Rwanda, on March 21, 2018.
As of June, 2022, 54 states have signed the agreement.
Trading under the AfCFTA commenced on July 1st, 2020.
Ghana is the host of the continental Secretariat of the AfCFTA.
7th July will be officially celebrated as the Day of African Integration in commemoration of the historic operationalisation launch of the AfCFTA.

Here are some of the benefits and challenges that are expected.

Benefits of AfCFTA

Diversification

The agreement aims at diversifying trade exports, minimising over-dependence on extractive industries to higher-value added products and services. Between 1990 and 2014, developed nations diversified their economies while most African countries relied on extractive industries.

Oil represented more than half of Africa’s exports to non-African countries from 2010 to 2015, while manufactured goods made up only 18 percent of exports to the rest of the world.

Vera Songwe, Economic Commission for Africa’s executive secretary, believes that the AfCFTA will encourage diversification because exports that would gain most are those that are labour-intensive, like manufacturing and agro-processing, rather than the capital-intensive oil and minerals.

In addition to diversification of goods and services, the AfCFTA will allow businesses, particularly SMEs in Africa, to diversify by export destinations within the continent. This will enable SMEs to enter new markets and expand their customer base.

Open Borders

Opening up of borders through the AfCFTA is expected to increase employment opportunities for Africa’s youths and women who account for 70% of small-scale, cross-border trade.

Moreover, a single African market will provide a solution to one of the biggest obstacles the continent is facing: professional mobility and skills portability. The majority of African migrants choose to stay on the continent and 70% of sub-Saharan migrants move within Africa.

Visa bureaucracy and eligibility criteria are among the biggest hurdles to mobility within Africa. In Nigeria, for instance, the eligibility criteria for a visa for a skilled worker are considered too demanding, focusing on formal education levels rather than on experience gained through work.

Movement of labour will be enhanced by other continental initiatives such as the Protocol on Free Movement of Persons and Right to Residence and Right to Establishment.

Intra-Regional Trade

The AfCFTA will unlock Africa’s economic potential by boosting intra-regional trade. Africa’s intra-regional trade accounted for just 17% of exports in 2017 versus 59% in Asia and 69% in Europe. The UN Economic Commission for Africa estimates that the implementation of the agreement could increase intra-African trade by 52% by 2022.

Elimination of Tariffs

One of the key components of the agreement is the reduction of export tariffs. Members will eliminate tariffs on most goods, which will increase trade in the region by 15-25% in the medium term.

Majority of the members will benefit from 90% tariff cuts within a five-year period. The deadline for the cuts is ten years for countries listed as “Least Developed Countries” by the United Nations. Other countries such as Mozambique, Niger and Malawi, obtained an extension of 15 years.

Tariffs elimination is expected to boost SMEs, which are responsible for more than 80% of Africa’s employment and 50% of its GDP.

Furthermore, the agreement will also eliminate non-tariff barriers to trade such as import quotas, long customs delays at the borders and subsidies.

Reduction in Input Costs

The process of importing raw materials from other member states will be simplified. SMEs in Africa will be able to set up production units in other African countries to access cheaper means of production.

Improved Quality and Compliance Standards

The AfCFTA has identified quality and compliance as a key element in the trade zone. This will involve standards regarding health, safety, and the environment, leading to harmonised quality standards on the continent.

Challenges

There are huge challenges ahead that need to be tackled for the continent to realise the benefits outlined above. Here are some of the expected challenges.

Uneven Development

Levels of development on the continent vary significantly. For example, over 50% of Africa’s cumulative GDP is contributed by Egypt, Nigeria and South Africa, while Africa’s six island nations collectively contribute just 1%.

Competing Trade Blocs

Currently, Africa has 8 competing trade blocks. According to the Economic Commission for Africa report, a key hindrance to integration in Africa has been the multiplicity of regional economic communities with overlapping memberships, resulting in a duplication of efforts and waste of scarce resources. Out of sub-Saharan Africa’s 53 countries, only 6 are members of one regional economic community, 26 belong to two and 20 are members of at least three.

Therefore, fewer regional communities would reduce administration costs and provide funds to improve day-to-day operations and finance projects.

Movement of Labour

Mo Ibrahim Foundation notes that there are limited or weak frameworks for recognition and compatibility of skills, educational and experience qualifications across national borders. This hinders the ability of migrants to enter and effectively engage in continental labour markets.

Rules of Origin

Jammie de Melo argues that free trade will also require harmonising rules of origin (the criteria needed to determine the national source of a product) at the continental level since most countries still maintain different trade policies with extra-continental partners.

Increased Competitive Pressure

Small African economies will face stiff competition from Africa’s leading economies. For example, African countries that rely on small-scale farming will not be able to compete with large agribusinesses in high-income African countries such as South Africa, Kenya, Ethiopia, Egypt and Nigeria.

Environmental Degradation

Tough competition may lead some companies to disregard the environment to be able to compete. Many SMEs are likely to cut costs, including those related to manufacturing and the proper dumping of waste.

Conclusion

Looking at past continental agreements, the success of the AfCFTA will depend on political will, genuine commitment and proper implementation. Common social, political and economic problems on the continent such as corruption, wars, and poor governance need to be urgently addressed for the benefits of the AfCFTA to be realised.