March 1, 2022

Africa’s Unfinished Trade Agenda

Hippolyte Fofack March 1, 2022

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While many observers have touted the African Continental Free Trade Area as a game changer for the continent, trade liberalization alone will not necessarily guarantee economic success. Member countries must also implement robust trade facilitation measures, and engage with external partners as a unified trading bloc.

CAIRO – The African Continental Free Trade Area (AfCFTA), which entered into force on January 1 last year, promises to accelerate the diversification of the region’s economies and reduce the impact of commodity-price cycles on growth. Whereas Africa’s external trade is dominated by primary commodities and natural resources, the first shipment under the AfCFTA – from Ghana to South Africa – comprised manufactured goods of the sort that largely drive intra-African trade.

Many therefore hope that the AfCFTA – by creating a single market of 55 countries with a total population of more than 1.3 billion and a combined GDP of $3.4 trillion – will catalyze industrialization as firms take advantage of economies of scale to spread the risk of investing in smaller markets. To that end, the trade agreement will eliminate tariffs on 90% of goods (the ultimate goal is 97% liberalization).

The AfCFTA will likely boost foreign direct investment across Africa – empirical evidence elsewhere shows that joining a free-trade area could increase it by around a quarter – and shift its emphasis from natural resources toward labor-intensive manufacturing industries. Moreover, the pact has the potential to transform African economies, significantly increase the continent’s share of global trade, and strengthen its bargaining power in international trade negotiations.

But while many have touted the AfCFTA as a game changer for Africa, trade liberalization alone will not necessarily guarantee economic success.

To be sure, the agreement has rightly attracted much attention in academic and policy circles. The World Bank, the International Monetary Fund, the United Nations Conference on Trade and Development, and the African Export–Import Bank have all compiled extensive studies on the AfCFTA’s potential impact. And the Journal of African Trade recently published a special issue on “The AfCFTA and African Trade,” which I co-edited with Andrew Mold of the UN Economic Commission for Africa.

All these analyses point to the agreement’s significant and positive impact on economic development. Specifically, the empirical results according to computable general equilibrium models – which allow for trade-diverting and trade-creating effects of tariffs and non-tariff shocks by exploiting countries’ comparative advantage and price adjustments – are highly encouraging. Aggregate headline estimates derived from these models show that the AfCFTA would increase Africa’s GDP by 0.5% after full implementation in 2045, relative to a scenario without continental trade integration.

Real wages would increase for both skilled and unskilled workers, and especially for the latter, suggesting a shift toward more inclusive growth. The World Bank estimates that the AfCFTA could lift 30 million people out of extreme poverty and around 68 million out of moderate poverty by 2035, with women benefiting more than men. Trade integration could also have a significant impact at the household and corporate level: Combined consumer and business spending is projected to reach $6.7 trillion by 2030.

Trade within Africa is expected to grow strongly under the AfCFTA, with intracontinental exports increasing by 34% (equivalent to around $133 billion annually) compared to a scenario without the agreement. Moreover, around two-thirds of intra-African trade gains will likely be realized in the manufacturing sector – historically the most effective elevator out of poverty. This would set the stage for a welfare-enhancing and mutually reinforcing relationship between intraregional trade and industrialization, resulting in sustainable growth of well-paid manufacturing jobs while broadening countries’ tax bases and improving their external accounts.

But substantial non-tariff barriers, regulatory differences, and divergent sanitary, phytosanitary, and technical standards increase the costs of cross-border trade within Africa by an estimated 14.3%, well above the average tariff of 6.9%. Removing these constraints and deepening the integration of African businesses into global value chains will significantly boost intra-African trade and drive growth. The World Bank estimates that full implementation of the AfCFTA could raise Africa’s real income by 7% (about $450 billion) by 2035, with trade facilitation measures to cut red tape and simplify customs procedures responsible for $292 billion of this increase.

Overcoming Africa’s chronic infrastructure deficit – both physical and digital – will boost the power of trade creation and help to ensure the successful implementation of the AfCFTA. By tackling the continent’s supply-side constraints, policymakers can enhance both production and logistics in a region with more landlocked countries (16) than any other. As investors seek to capitalize on the economies of scale offered by the AfCFTA, integrating markets and improving connectivity must be a top priority.

Clarifying the AfCFTA’s rules of origin – which determine whether products are duty-free under the agreement – also is key to accelerating industrialization and the development of regional value chains. Despite the challenges posed by COVID-19, negotiators have made significant progress on the rules-of-origin agreement, which should be concluded later this year. That will pave the way for phase-two negotiations on key drivers of future growth, including protocols on investment, competition policy, and intellectual-property rights.

But, as the rush to conclude bilateral trade agreements with third-party countries suggests, Africa’s most important trade-integration challenge may be the perennial one of putting the region’s collective interest first. Although the AfCFTA does not bar member countries from entering such negotiations, bilateral deals with third parties could affect African trade patterns and set precedents for regional trade and investment rules. In practice, they could lead to trade deflection, given that the AfCFTA’s most-favored-nation clause automatically extends tariff concessions granted to a third party to AfCFTA members.

As Jeffrey Sachs has argued, “Without a doubt, if Africa becomes economically integrated, it will be a global leader and the largest economic region in the world.” As of this writing, 41 countries have ratified the AfCFTA. But if the pact is to become the launchpad for Africa’s deeper integration into the global economy, governments must complement trade liberalization with robust trade facilitation measures, and strengthen regional coordination in order to engage with external partners as a unified trading bloc.

Hippolyte Fofack is Chief Economist and Director of Research at the African Export-Import Bank (Afreximbank).

The text has been adapted from Project Syndicate website

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