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The Potential Benefits of African Continental Free Trade Area Agreement (AfCFTA)
03. August 2020 at 12:34
The African union (‘AU’) is composed of all states within the continent. Within AU, there are numerous Regional Economic Communities (RECs) such as the East African Community (EAC) , the Common Market for Eastern and Southern Africa (COMESA) , the Economic Community of West African States (ECOWAS) , the Southern African Development Community (SADC) , the Arab Maghreb Union (UMA),...

the Economic Community of Central African States (ECCAS), the Community of Sahel- Saharan States(CEN-SAD) , and the Intergovernmental Authority on Development(IGAD). The many subdivisions within the continent has over the years raised concern with the continent’s inability to act as one block. 


Cognizant of the fact that Africa continues to lag behind other regions in terms of intra-African trade which stands at about 18% in comparison to Intra-Asian trade which is about 59% and 69% of Intra-European trade, the 18th Ordinary Session of the Assembly of Heads of State and Governments of the AU in January 2012, adopted a decision to establish a Continental Free Trade Area by 2017. The Continental Free Trade Area was: “to create a single continental market for goods and services, with free movement of business persons and investments, and thus pave the way for accelerating the establishment of the Customs Union…. The establishment of the CFTA and the implementation of the Action Plan on Boosting Intra-African Trade (BIAT) provide a comprehensive framework to pursue a developmental regionalism strategy.”[1]


This deadline was, however, not met. The Action Plan on Boosting Intra-Africa Trade (BIAT) which had also been endorsed by the Summit identifies seven priority action clusters: trade policy, trade facilitation, productive capacity, trade related infrastructure, trade finance, trade information, and factor market integration.


During the 10th Extraordinary Summit of the AU Assembly on 21 March 2018 in Kigali, Rwanda, the Heads of State and Governments endorsed the framework and road map for the establishment of the African Continental Free Trade Area (AfCFTA), along with the Kigali Declaration[2] and the Protocol to the Treaty Establishing the African Economic Community relating to the Free Movement of Persons, Right to Residence and Right to Establishment[3]. Forty-four African countries then signed this ‘umbrella’ Agreement of the AfCFTA, which is officially known as Agreement Establishing the African Continental Free Trade Area. (It is hereinafter cited as the AfCFTA Agreement.). Consequently, AfCFTA was adopted on 21st March, 2018 and it came into force on 30th May, 2019.  This article seeks to discuss general overview of AfCFTA, its promise and effect to the future of African countries. 


General overview of AfCFTA[4]

The AfCFTA is more than just another standard Free Trade Area (FTA)[5] that is restricted to trade in goods. It is an ambitious member-driven continental integration initiative that seeks to allow Africans to become the controllers of their development rather than its passive victims more so in matters pertaining to trade in goods, trade in services, dispute settlement, competition, investment and intellectual property rights. By forging unity in diversity, the AfCFTA if properly implemented stands to give African countries stronger bargaining power especially in the current world market.


It is important to note that the establishment of the AfCFTA, a single African air transport market (SAATM), and the free movement of people are AU’s inaugural initiatives under Agenda 2063. The AU has not only adopted legal instruments for effective implementation of these flagship projects but also committed itself to steer the continent in meeting its global commitments under the SDGs by implementing Agenda 2063. The UN Agenda 2030’s 17 SDGs are in the 20 goals of Agenda 2063.


While the AfCFTA’s implementation is meant to occur incrementally, it seeks to achieve the following principal objectives:


  • create a single continental market for goods and services, with free movement of business persons and investments;


  • expand intra-Africa trade across the regional economic communities and the continent in general by: progressively eliminating tariffs and non-tariff barriers; progressively liberalising trade in services; enhancing cooperation on investment, intellectual property rights, on customs, trade facilitation, and all trade-related areas;


  • enhancing competitiveness and supporting economic transformation;


  • promote and attain sustainable and inclusive socio-economic development and gender equality;


  • promote industrial development through diversification, agricultural development and food security as well as regional value chain development;


  • create a foundation for establishing a continental customs union; and


  • establishing and maintaining an institutional framework for the implementation and administration of the AfCFTA.[6]


According to the United Nations Economic Commission for Africa (UNECA), AfCFTA is expected to boost consumer spending to about US$1.4 trillion in 2020, increase intra-African trade by $35 billion (52%) per year by 2022, and increase agricultural and industrial exports by $4 billion (7%) and $ 21 billion (5%) respectively.[7] UNECA also expects imports from outside of the continent to decrease by at least $10 billion per year. Whether or not the projected goals can be achieved remains to be seen given the fact that free trade under the Agreement has not begun and trade facilitation measures are yet to be introduced.[8]


According to the African Trade Report (2018)[9], AfCFTA is meant to lay the foundation for the establishment of a continental customs union, which will deepen regional economic integration on the continent. The Agreement is lauded as a step above the Lagos Plan of Action and Abuja Treaty, both of which only contemplated continental integration at the level of a customs union.


The coming into force of AfCFTA has received mixed reactions. While some are applauding what they call the ‘long overdue’ move to position Africa as a formidable economic player, others are questioning the commitment of state parties in as far as its implementation is concerned. According to International trade law and regional integration expert, Professor Gerhard Erasmus, the task of implementing the Agreement becomes quite challenging primarily because “all the standard trade related disciplines (e.g. customs administration, trade remedies, trade facilitation, non-tariff barriers, standards, dispute settlement, domestic regulation of service and investment etc) must become operational in order for the benefits to materialize”. Gerhard notes that while the actual implementation of the AfCFTA will take time and good domestic governance, the state parties will continue to trade under the rules of existing RECs. [10] The learned professor acknowledges that overlapping membership challenges (such as different rules of origin and standards requirements) will further compound matters for the private sector. Gerhard further contends that:


“The implementation of the AfCFTA will require many follow-up activities by the State Parties. New national laws and institutions will be necessary. In the case of trade remedies (anti-dumping, countervailing and safeguard measures), for example, investigating authorities, legislative frameworks and judicial review procedures must exist. Most African States do not presently have the necessary arrangements in place”.[11]


Potential Benefits/Effect of AfCFTA to the future of Africa

A research paper[12] published by the United Nations Conference on Trade and Development (UNCTAD) in February 2018 contends that the AfCFTA presents many sustainable development and economic growth opportunities for African economies. The paper also notes that notwithstanding the opportunities that the Agreement creates, not all countries are expected to benefit equally.[13] While expected average GDP growth is around 1%, some countries are expected to grow over 3%, while some others are expected to contract. Additionally, the gain of welfare benefits also necessitates relevant costs and commitments.[14].

The paper reiterates Professor Gerhard’s argument that most of the benefits of further trade integration (i.e. welfare benefits from lower import prices, production efficiency and increase in outputs, higher value-added jobs and exports, etc.) will materialise in the long term, while most of the associated costs of adjustment and integration (i.e. loss in trade tariff revenue, local SMEs dying out in the face of stronger competition, adjusting unemployment, required investment in infrastructure, political and regulatory reforms, etc.) will be incurred in the short term.[15].


Using the Global Trade Analysis Project (GTAP) computable general equilibrium (CGE) model, UNCTAD has estimated the quantitative effects of the AfCFTA according to 2 long-term scenarios: a full Free Trade Agreement (FTA) and Special Product Categorization (SPC). According to UNCTAD, a full Free Trade Agreement (FTA) eliminating all tariffs in the CFTA could generate welfare gains of US$ 16.1 billion, at the cost of US$ 4.1 billion in trade revenue losses (representing 9.1% of current tariff revenues). GDP and employment are expected to grow by 0.97% and 1.17% respectively. Intra-African trade growth is estimated at 33% and the continent’s trade deficit is expected to drop by 50.9%.[16]


UNCTAD further contends that Special Product Categorization (SPC) permanently exempts sensitive products from liberalisation. In a scenario in which the sector with the highest current tariff revenue would be exempted from liberalisation, UNCTAD simulations estimate a welfare gain of US$ 10.7 billion in the long term. Tariff revenue losses are expected at US$ 3.2 billion (representing 7.2% of current tariff revenues). GDP and employment growth are expected to grow by 0.66% and 0.82% respectively. Intra-African trade is expected to grow by 24%, while, Africa’s trade deficit only shrinks by 3.8%.[17] .


Figure 1: Welfare gains from regional Integration in Africa (billion US$)


Source: GTAP estimates.


Table 1: Selected Indicators Comparative Table

Source: GTAP estimates.


UNCTAD also estimates the employment effect of the agreement by sub-sector. The importance of the agricultural sector to African economies cannot be overstated given that in 2016 alone, it employed about 53% of the continent’s labour force. This explains why governments are worried about possible adverse impacts of the AfCFTA on the agriculture sector’s economic growth, which would massively affect employment across the continent. Even though the largest employment growth rates are found in manufacturing and services sectors, agriculture sub-sectors are also expected to grow as demonstrated in Figure 2 below.


Figure 2: Africa’s GDP weighted employment growth by sub-sector (Full FTA, per-cent)

Source: GTAP estimates


Conclusion

Although the AfCFTA is a great step towards regional integration, there is still a long road ahead and quite a bit of work to do. It is vital that African countries commit to continue improving their institutional capacities to efficiently tax and redistribute the gains from the AfCFTA as fairly as possible; making sure that no one is left behind. This includes integrating and harmonizing regulatory measures, eliminating non-tariff barriers to trade and investment, and facilitating the entry into the formal economy.



End-notes

[1] https://au.int/en/ti/cfta/about and tralac’s AfCFTA resources page: https://www.tralac.org/resources/by-region/ cfta.html

[2] The Kigali Declaration for the Launch of the African Continental Free Trade Area is a 2-page statement of the AU Heads of State and Government which launches the AfCFTA, directs Member States to expedite the operationalisation of the AfCFTA, to finalise outstanding Phase I issues, to commence Phase II negotiations, and directs the Ministers responsible for Trade to develop a Roadmap on Phase II negotiations, their conclusion and the implementation of the outcomes thereof.

[3] It is a Protocol to the Abuja Treaty, not the AfCFTA Agreement.

[4] https://au.int/sites/default/files/treaties/36437-treaty-consolidated_text_on_cfta_-_en.pdf.

[5]An FTA is a legal construct for liberalising trade in goods.

[6] Article 4 of the AfCFTA

[7]http://www.saana.com/wp-content/uploads/2014/09/Saana-Institute-Policy-Brief01_CFTA.pdf accessed.

[8]See Matheson, A. 2019 The AfCFTA is laudable, but its imminent benefits are overstated available at https://africanarguments.org/2019/06/26/the-afcfta-is-laudable-but-its-imminent-benefits-are-overstated/

[9] https://s3-eu-west-1.amazonaws.com/demo2.opus.ee/afrexim/African-Trade-Report-2018.pdf

[10]Article 19(2) AfCFTA

[11]Erasmus, G. (2019) How will the AfCFTA enter into force, be implemented, and be completed? tralac Working Paper No. S19WP08/2019. Stellenbosch: tralac

[12]Saygili, M., Peters, R., and Knebbel, C. (2018) Africa Continental Free Trade Area: Challenges and Opportunities for Tariff Reductions UNCTAD Research Paper No. 15. UNCTAD/SER.RP/2017/15/Rev.1. available at http://unctad.org/en/PublicationsLibrary/ser-rp-2017d15_en.pdf

[13]ibid.

[14]ibid note 12.

[15]ibid note 12.

[16]Saygili, M., Peters, R., and Knebbel, C. (2018) Africa Continental Free Trade Area: Challenges and Opportunities for Tariff Reductions UNCTAD Research Paper No. 15. UNCTAD/SER.RP/2017/15/Rev.1. available at http://unctad.org/en/PublicationsLibrary/ser-rp-2017d15_en.pdf.

[17]Saygili, M., Peters, R., and Knebbel, C. (2018) Africa Continental Free Trade Area: Challenges and Opportunities for Tariff Reductions UNCTAD Research Paper No. 15. UNCTAD/SER.RP/2017/15/Rev.1. available at http://unctad.org/en/PublicationsLibrary/ser-rp-2017d15_en.pdf.



REFERENCES

Balistreri, E.J., Tarr, D.G. and Yonazawa, H. (2014a). Reducing trade costs in east Africa: deep

regional integration and multilateral action. World Bank Policy Research Paper 7049. Washington DC: World Bank. September.


Erasmus, G. (2019).  How will the AfCFTA enter into force, be implemented, and be completed? tralac Working Paper No. S19WP08/2019. Stellenbosch: tralac


Erasmus, G. (2019). Ratification of the AfCFTA Agreement: What happens next? tralac Working Paper No. S19WP02/2019. Stellenbosch: tralac.


Erasmus, G. (2019). The AfCFTA as a Strategy and a Design. tralac Working Paper No. US19WP04/2019. Stellenbosch: tralac.


Hummels, D. and Schaur, G. (2013). Time as a trade barrier. American Economic Review, 103:

1-27.


Jensen, H. G., Sandrey, R. and Vink, N. (2012). The welfare impact of a Free Trade Agreement: ‘Cape to Cairo’. Agrekon 51(4).


Jensen, H. G., and Sandrey, R. (2015). The Continental Free Trade Area – A GTAP Assessment. Stellenbosch: tralac.


Kee, H.L., Nicita, A. and Olarreaga, M. (2009). Estimating trade restrictiveness indices. Economic Journal, 119: 172-199.


Minor, P. (2013). Time as a barrier to trade: A GTAP database of ad valorem trade time costs. ImpactEcon.


Saygili, M., Peters, R., and Knebbel, (C. 2018). Africa Continental Free Trade Area: Challenges and Opportunities for Tariff Reductions. UNCTAD Research Paper No.15.UNCTAD/SER.RP/2017/15/Rev.1.


UNECA. (2013). Harmonizing policies to transform the trading environment. Assessing Regional Integration in Africa VI. Addis Ababa: United Nations Economic Commission for Africa.





















Cite This Article As: Maulline Gragau. "The Potential Benefits of African Continental Free Trade Area Agreement (AfCFTA)." International Youth Journal, 03. August 2020.

Link To Article: https://youth-journal.org/the-potential-benefits-of-african-continental-free-trade-are





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