Free trade offers a USD 3 trillion prize

The African Continental Free Trade Area could bring benefits up to USD 3 trillion to the continent’s economy, if governments embrace it and lay the correct foundations, according to a report.

The scale of the potential economic impact which the African Continental Free Trade Area (AfCFTA) could have on the continent has been examined by a report released by international law firm Baker McKenzie and analysis provider Oxford Economics.

AfCFTA’s USD 3 trillion Opportunity: Weighing Existing Barriers against Potential Economic Gains suggests there could be growth of up to USD 3 trillion, driven largely by intra-African trade, an area of business which for the time being lags behind trade with countries from other regions.

However, this is reliant on the successful implementation of the agreement, including proper rules, regulations and mechanisms being in place, particularly relating to origin rules, digital payments and the elimination of non-tariff barriers. AfCFTA is currently implemented in 27 countries. Africa’s biggest economy, Nigeria, become the 53rd country to sign the agreement, in July.

Mattias Hedwall, head of the international trade group at Baker McKenzie, said in a statement that “once implemented, it will lead to sustainable socio-economic development, increased diversification, a boost in investment, trade liberalisation, the industrialisation of African economies, the establishment of new cross-border value chains and better insulation from global shocks”.

Perhaps unsurprisingly, it is a group of the continent’s most established economies, South Africa, Ghana, Ivory Coast, Kenya and Morocco that will have the biggest gains, benefitting from good trade links, open economies, good infrastructure and positive business environments, while South Africa has a good manufacturing base. Other countries will benefit less, with the impact being uneven across Africa.

“The message should be that freeing up trade is going to be the big engine of African growth through the 2020s and the first movers have the biggest advantages,” commented Hedwall.

That is not straightforward, due to issues of politics, infrastructure and resources, as well as limitations created by existing date trade agreements. The report highlighted the role of regional economic communities in achieving these aims, but also warned that some of these communities create obstructions themselves.

Wildu du Plessis, the firm’s head of Africa, added that “the vast infrastructure gap in Africa, including transport and utilities infrastructure, must be urgently addressed so as not to restrict increased trade integration”.

INTERNAL OPPORTUNITIES

The lack of intra-African trade to date has been a major limiting factor in economic growth and a properly implemented AfCFTA should go a long way to unlocking that potential, but other measures are being attempted as well, such as improved transport links, access to visas and initiatives such as the risk participation agreement recently unveiled by Absa and the African Development Bank (AfDB).

The report noted that there is just 17% trade between AfCFTA countries, far behind the 64% of interregional trade achieved within the European Union.

Kamal Nasrollah, head of Baker McKenzie in Casablanca, explained: “These intracontinental trade shortcomings underscore the extent of lost revenue and development opportunities for African countries.”

His Johannesburg-based colleague Virusha Subban, a customs and trade partner, explained that while the majority of Africa’s exports are natural resources, it has to import products and machinery.

AfCFTA creates the opportunity to grow the continent’s manufacturing base from only 10% of the continent’s GDP and to start to meet its own demand, making it the sector which could benefit the most from the agreement.

“This misalignment signals missed opportunities to reduce foreign 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,” Subban argued.

Hedwall said: “Economies that are less export-oriented or have unfavourable business environments should identify their comparative advantages and key strengths, and leverage these to tap into new or established AfCFTA value chains.”

He concluded. “While there are still numerous challenges to be resolved, we expect that if the barriers to its effective implementation can be addressed, the next decade will see the growth of the African Continental Free Trade Area into one world’s most exciting new global trading zones.”

The World Bank’s annual Doing Business report recently revealed a stable business climate on the whole across Africa, but highlighted areas of improvement if the continent is to catch up with its neighbours and fulfil its potential.

Around the same time, the African Governance Report from the Mo Ibrahim Foundation found slow progress on improving governance standards across Africa.

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