African Continental Free Trade Area Launched
Creating One African Market
Introduction
African countries opened their markets on Jan. 1, 2020, under the African Continental Free Trade Area agreement, allowing duty-free trading of goods and services across borders despite the COVID-19 pandemic and other logistical challenges. Trading under the AfCFTA was originally planned for July 1, 2020, and it was delayed because of the aforementioned pandemic.
Market integration has long been the vision of African colonial freedom fighters, as Kwame Nkrumah; the first president of Ghana and one of the founding fathers of Organization of African unity (OAU), beautifully put in his book “Africa Must Unite.”
African leaders’ vision and commitment to continental integration led to the creation of the OAU (now AU) in 1963.
The agreement that established the African Continental Free Trade Area became effective on May 30, 2019, and it aims to accelerate the growth of intra-African trade and leverage this activity as a means of fueling sustainable development, therefore strengthening Africans’ common voice and creating an environment where policy negotiation can take place.
The deal unites an estimated $3 trillion market and could help to realize more than $84 billion in untapped intra-African exports, according to a new report released by the The African Export-Import Bank (Afreximbank).
With all African countries except Eritrea participating, AfCFTA would have the largest number of member countries in any trade deal since the formation of the World Trade Organization.
Objectives of African Continental Free trade Area
- Establish a single continental market for goods and services, with free movement of business professionals and investments, accelerating the establishment of the Continental Customs Union and the African customs union.
- Expand intra-African trade through better harmonization and coordination of trade liberalization and facilitation across Regional Economic Communities (RECs) and across Africa.
- Resolve the challenges of multiple and overlapping memberships and expedite the integration processes.
- Enhance competitiveness at the industry and enterprise level by leveraging opportunities to produce at scale, continental market access and better reallocation of resources.
African Continental Free Trade Area: Potential Economic Impact
A World Bank report has emphasized the importance of AfCFTA in becoming a game changer on the continent, especially as African countries seek to bounce back from the devastation caused by the COVID-19 pandemic.
As the global economy is in turmoil due to the coronavirus pandemic, creation of the vast AfCFTA regional market is a major opportunity to help African countries diversify their exports, accelerate growth, and attract foreign direct investment.
Again, the report adds, the COVID-19 crisis is also contributing to increased food insecurity, as currencies are weakening and prices for staple foods are rising in many parts of the region. Also, policy responses that result in sub regional trade blockages will increase transaction costs and lead to even larger welfare losses.
“A successful implementation of AfCFTA would be crucial,” the World Bank report emphasized. “In the short term, the agreement would help cushion the negative effects that COVID-19 has on economic growth by supporting regional trade and value chains through the reduction of trade costs. In the longer term, AfCFTA would allow countries to anchor expectations by providing a path for integration and growth-enhancing reforms.
“Furthermore, the pandemic has demonstrated the need for increased cooperation among trading partners,” the report continued. “By replacing the patchwork of regional agreements, streamlining border procedures, and prioritizing trade reforms, AfCFTA could help countries increase their resilience in the face of future economic shocks.”
“Creating a single, continent-wide market for goods and services, business and investment would reshape African economies,” stated Caroline Freund, global director of trade, investment and competitiveness. “The implementation of AfCFTA would be a huge step forward for Africa, demonstrating to the world that it is emerging as a leader on the global trade agenda.”
The goods and services that Africans trade with each other require greater skill and more advanced technology than the goods and services that African nations trade with countries outside the continent.
The potential that AfCTA has to lift African youth out of poverty is enormous. With Africa hand picked to be the next factory of the world, AfCTA could be a major driver of new jobs for young Africans.
The chart below, which incorporates data from The United Nations Conference on Trade and Development (UNCTAD), illustrates the share of medium and high-technology manufacturers in African countries’ exports to Africa, developed nations and the rest of the world.
“While medium and high technology manufactures account for 25.4 per cent of intra-African trade, they only account for 14.1 percent of African countries’ exports to developed countries,” an 2018 UNCTAD report stated.
Domestic firms may become more efficient as a result of trade liberalization and its impact on competitiveness, the report noted.
Increased competition resulting from trade liberalization may lead to greater efficiency of domestic firms. Competitive pressures require firms to leverage new technologies, use their resources more effectively and innovate in order to survive. Trade liberalization, in some cases, can be a force that can help champion structural changes which will be positive for the continent.
“The African Continental Free Trade Area has the potential to increase employment opportunities and incomes, helping to expand opportunities for all Africans,” Albert Zeufack, who works for the World Bank as chief economist for Africa, said in a statement.
“The AfCFTA is expected to lift around 68 million people out of moderate poverty and make African countries more competitive. But successful implementation will be key, including careful monitoring of impacts on all workers — women and men, skilled and unskilled — across all countries and sectors, ensuring the agreement’s full benefit.”
Possible Hurdles of African Continental Free Trade Area
The African Continental Free Trade Area will provide the opportunity for economic inclusion, but at the same time, industry participants are taking on risk by breaking ties with former trading partners.
Trade could prove difficult in the beginning, especially when more countries are tied to their colonial fathers for business. Many of the countries participating in the agreement will also get donor support from their trading partners, so allegiance will be key to ensuring the success of this pact.
Sharp declines in government tariffs could have significant effects on government revenues, and therefore budgets, of some countries. Substantial short-term declines in government revenue may adversely affect the government’s capacity to invest in the infrastructure, education and social programs which are crucial for attaining sustainable development.
Trade liberalization can also pose some challenges for the government in promoting competition in local markets. While some firms may grow faster by taking advantage of economies of scale, others may collapse, as they are unable to compete.
It will be a challenge to make way for easy and quick facilitation of people and goods in Africa, because there is so much fragmentation, with economies at many stages of development. For now, we can only hope for better cooperation.
Africa Continental Free Trade Area and the Crypto Space.
There is no doubt that a successful AfCTA will do more good to the continent than bad, but for effective trading activities to exist on the continent, there is the need for a single currency like the euro, which will serve as a common medium of exchange for the region.
Which African currency do you think can serve the continent to a larger extent until a continental currency emerges? As fiat becomes extinct, we can only expect that one or more central bank digital currencies will emerge, and they could help champion this cause in Africa. As we push for adoption on the continent, I live to see the day where I can use bitcoin to buy from Algeria (North Africa) and have my product delivered to me in Ghana (West Africa) without having any problems.
Final Remarks
It is prudent to note that the benefits that AfCTA provides to the continent will exceed the risks. Africa will be more sustainable if its citizens trade with each other and the recently created trade agreement helps open up new opportunities for those on the continent who are involved with extracting and selling raw materials.
To every investor watching this space, allow me to predict that Africa is the next factory of the world, meaning that it is moving toward becoming a major production hub. As a result, the move to take advantage of the Africa market as early as possible will be to your advantage in the long run.
There is a reason why Volkswagen has expanded its footprint in Sub-Saharan Africa with the official opening of a vehicle assembly facility in Ghana.
“There is a new Africa emerging with a sense of urgency and purpose and an aspiration to become self-reliant,” Nana Akufo-Addo, president of Ghana, stated during a launch ceremony that took place in January 2021.
One Africa! One world! One continental currency!
Disclaimer: This content is for educational purposes only. It does not constitute trading advice. Past performance does not indicate future results. Do not invest more than you can afford to lose. The author of this article may hold assets mentioned in the piece. If you found this content engaging, and have an interest in commissioning content of your own, check out Quantum Economics’ Analysis on Demand service.
