The African Continental Free Trade Agreement (AfCFTA) entered into force on May 30, 2019, for the 24 countries that had deposited their instruments of ratification. The AfCFTA will be the world’s largest free trade area since the formation of the World Trade Organization. This milestone comes after two years of negotiations as part of the African Union’s (AU) long-term development plan, Agenda 2063, which calls for easing trade and travel across the continent. As of July 2019, African inter-regional trade stands amongst the lowest in the world. According to the AU, the average tariffs on the continent revolve around 6.1%, and businesses currently pay higher taxes when exporting within Africa compared to exporting outside the continent. Therefore, the main objective of the AfCFTA is to create a single continental market for goods and services, with free movement of business personnel and investments.
Although this AU initiative was created with the intent to boost the continent’s potential, like other Free trade Agreements (FTAs), it is viewed with skepticism by some mainly due to the competitive disadvantages and the reduction in tax-income for some economies. Furthermore, much like lessons learned from the European Union, a major potential challenge in harmonizing Africa’s diversified economies under one agreement is the wide variation that exists in their levels of development. Over 50% of Africa’s cumulative GDP is sourced from Egypt, Nigeria, and South Africa. The African continent has the highest level of income disparity of any continent. Africa’s biggest economies, Nigeria and South Africa, have had reservations on signing the agreement following objections from business leaders and unions. Following the AU’s summit in July 2019, Benin and Nigeria were the latest countries to sign the agreement, bringing the total number of signatories to 54 with only Eritrea anticipated to sign soon. Should all 55 AU members eventually sign the agreement, it would create a bloc with a cumulative GDP of $2.5 trillion and cover a market of 1.2 billion people.
On the other hand, proponents of the deal argue that African economies suffer from being significantly fragmented and are too small to support economic diversification as well as industrialization on their own. Therefore, African economies could benefit considerably from having a unified marketplace. The African Development Bank cited that the Continental Free Trade Area will stimulate intra-African trade by up to $35 billion per year, creating a 52% increase in trade by 2022; and a vital $10 billion decrease in imports from outside Africa.
Although significant progress has been made on the adoption of this continental free trade agreement since its initiation in 2017, most of the challenges still lie ahead. As with any drastic economic trade policy, the creation of winners and losers is inevitable. In particular, small and medium enterprises (SMEs) will be significantly affected by such a policy. Increased competitive pressure will result in small family farms potentially losing business to large agribusinesses. Additionally, local producers could lose huge sales to foreign suppliers as consumers seek cheaper products imported from other countries. Further challenges with regards to uniform labor laws and the protection of intellectual property would make the implementation process drastically tricky. Examining current FTAs around the world, one aspect that is substantially challenging is reviewing the rules of origin. These rules are used to determine the national source of a product, with origin determined by identifying the last country in which a product underwent a substantial transformation. The methods of making that determination, however, vary drastically from country to country. By granting each other trade preferences, AfCFTA member countries would source more intermediate and final goods among themselves rather than importing from abroad. The use of these trade preferences by AfCFTA member states will depend on whether the rules of origin are made too costly or complex to comply with, given that firms may instead forego these preferences and choose to trade with partners outside the AfCFTA.
Therefore, without a comprehensive policy-making and preferential treatment for Africa’s most at-risk economies, mainly the least developed countries, the AfCFTA could prove to be a force for economic divergence rather than a force for good. These challenges make it extremely important for the subsequent step of implementation as the most critical stage of this initiative.
