South Africa, Ghana and Cote D’Ivoire stand to maximise most benefits from the implementation of the African Continental Free Trade Area (AfCFTA) Agreement, according to new research.
It said this was due to existing favourable conditions such as open economies, good infrastructure and support business environment with the pendulum tilting towards South Africa the most for its existing connections across the continent and a well-established manufacturing base.
The research from the global firm, Baker McKenzie and Oxford Economics dubbed “AfCFTA’s US$ 3 Trillion Opportuinity: Weighing Existing Barriers Against Potential Gains,” shows that when fully implemented the agreement would unlock significant but uneven growth opportunities on the continent.
The Report also reveals that to unlock the full US$3 trillion in growth potential that free trade would bring to the region, governments and businesses across the continent would need to fully support the AfCFTA agreement and prioritise it over the patchwork of regional and competing agreements in Africa.
The report finds countries with good existing trade integration with their neighbours and which have open economies were most likely to benefit economically from lower trade tariffs with the tangible benefits of the agreement likely to be realized from 2030.
The AfCFTA would be the African Union brainchild and becoming the world’s largest free trade area by number of countries and it is so far in force in 27 countries.
Mattias Hedwall, Partner and Head of Baker McKenzie’s Global International Commercial & Trade Group, notes that the “AfCFTA agreement will create the world’s largest free trade zone by number of countries and is expected to revolutionise trade across the continent.”
“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,” he says
“The results of our analysis show countries that have already been bold enough to create more open, business-friendly environments stand to make the biggest gains. 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.”
Kamal Nasrollah, Partner and Head of Baker McKenzie in Casablanca explains that, currently, regional integration in Africa is largely an unattained goal, despite the continent’s Regional Economic Communities (RECs). Overall, the RECs have complex and often conflicting policies and have achieved very different levels of integration to-date.
“Despite the challenges, however, some RECs have successfully encouraged effective trade between member countries. For example, Côte d’Ivoire, Kenya, Senegal and South Africa have become regional trading hubs, having leveraged alliances they established through their RECs.
Morocco is also an active trade hub within the Union du Maghreb Arab (UMA) trade agreement as well as the various trade agreements it has entered into with the US, the EU and the francophone Africa free-trade zone (UEMOA).
One of the ways forward for African economies to further implement effective intraregional trade may be to draw on the lessons learned from these successful RECs,” Nasrollah says.
Virusha Subban, Partner specialising in Customs and Trade at Baker McKenzie in Johannesburg, explains that while African nations may trade within their respective RECs under preferential terms, trade beyond these regional agreements is generally subject to most-favored nation (MFN) tariffs, which are much higher and act as a disincentive to trade integration.
The Report compares Africa’s 20 largest economies in terms of the share of exports destined for other economies on the continent. Some economies, such as Uganda and Zimbabwe, buck the overall trend, trading more with their neighbours than other African nations do.
Yet, their economies are small in contrast to those of Egypt, Nigeria and South Africa, which together represent more than half of the continent’s GDP. Egypt and Nigeria, for instance, have very limited trade relationships with their African peers. As major fuel exporters, they are focused on exports outside the continent.
Wildu du Plessis, Head of Africa at Baker McKenzie in Johannesburg, says the report underscores the importance of not only lowering tariff barriers but also addressing non-tariff barriers to intra-regional trade. Some of the most significant obstacles to AfCFTA are inadequate infrastructure, poor trade logistics, onerous regulatory requirements, volatile financial markets, regional conflict and complex and corrupt customs procedures. These can be even more detrimental to trade expansion than tariff measures.
“There is a strong consensus that the vast infrastructure gap in Africa, including transport and utilities infrastructure, must be urgently addressed so as not to restrict increased trade integration,” du Plessis notes, adding that South Africa is next to chair the African Union, starting in January 2020 and will be keen to facilitate progress in free trade on the continent under the agreement, especially as it is one of the nations with the greatest opportunities for growth.
Du Plessis explains that large infrastructure projects in the pipeline should improve the situation with some non-tariff barriers. These include the Trans-Maghreb Highway in North Africa and the North-South Multimodal Corridor, connecting extensive parts of Southern Africa, as well as the Central Corridor project and the Abidjan-Lagos Corridor Highway project.
