Responding to trade creation and diversion under AfCFTA

Now that Africa has begun one of its most significant attempts at economic integration, with the commencement of trading under the African Continental Free Trade Area (AfCFTA) agreement, we should continue to review our preparedness to profit from the unfolding opportunities, knowing that we can’t possible predict in advance how all the pieces will fit.

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The 1.3 billion people living in the continent have the good prospect of doubling the trade among them, which has hovered around 16 – 18 per cent, over the years – a relatively poor record of intra-continental trade. Clearly, the free trade agreement will have profound impact on several aspects of the socio-economic life in Africa, and even beyond to its trading partners. Producers and consumers, whether big or small, will feel the impact of the agreement on prices, social well-being and migration. How these changes impact economic agents, especially the Small and Medium Enterprises (SMEs), will depend significantly on what we do at these early stages when trade negotiations and rule-setting are the focus.

Domestic producers will lose market share as consumers go for cheaper imported alternatives. This is where the Standards Organization comes in to enforce standards, not just of imports but also of exports

Economic cooperation at the level of AfCFTA implies that there will be costs and benefits, however a participant looks at it. That is why experts talk about sharing the gains and losses of free trade in the most equitable manner as a basis of its survival. Under AfCFTA, like every other economic integration arrangement, trade will be created for member states and trade will also be diverted. The concept and idea of trade creation and diversion has been credited to some experts of International Economics who sought to explain the gains and pains of free trade arise, and how economic agent win and lose in the process, as a result of the intended and unintended consequences that follow free trade.

Trade creation as a concept, tries to explain how the removal of tariffs makes certain goods cheaper and increases the demand for them. The primary effect of tariff removal is to lower the cost of goods and increase their consumption. This increase in demand will ultimately lead to improved welfare among the citizens of the importing country – more variety and wealth effect of lower prices. Economic unions usually induce realignments or shifts in trade patterns. This realignment manifests in domestic consumers shifting their spending to cheaper imported alternatives, abandoning more expensive goods even made at home. Put simply, consumers will stop buying higher-cost domestic products and turn to lower-cost products of foreign partner countries in the union.

The negative implications of this shift on national output and employment are obvious. Domestic producers will begin to struggle with cheaper and probably better quality goods from abroad. At a recent meeting with Segun Awolowo, head of the Nigerian Export Promotion Council (NEPC), the Minister of Foreign Affairs, Geofrey Onyema was quoted as saying that Nigeria was being denied market access into a lot of countries because of the quality of her products. This raises fears of possible shift of local consumers to imported goods, under the free trade agreement. This situation threatens the hope of the NEPC of realizing up to $30 billion from non-oil export by 2025. The implication is that domestic producers will lose market share as consumers go for cheaper imported alternatives. This is where the Standards Organization comes in to enforce standards, not just of imports but also of exports.

Economists discuss the consequences of trade creation within the realities of its impact and the reaction of both producers and consumers – the so-called Production and Consumption Effects. When local consumers shift their demand to imported alternatives, the domestic production of the goods, which are replaced by imports from partner countries, is reduced or totally eliminated.

This may spell doom for domestic producers in a country already plagued by love of imported items. The consumption effect of trade creation in free trade, on the other hand, manifests in the increased consumption of goods, from the partner-countries, which have replaced high-cost domestic goods. Other consequences of free trade or the removal of tariffs is that government revenue from import duties will drop, putting further pressure on its fiscal responsibilities.

Clearly, AfCFTA opens the door for the influx of goods that are significantly cheaper than local alternatives. While this might be good for the citizens as individuals, we may be committing the sin or Fallacy of Composition if we infer that it is also good for the nation as a whole. We must guard against trade creation that would improve our individual welfare but ultimately hurts the national. Dumping, which is a major source of concern in every free trade arrangement, must be seriously prevented.

Unfortunately, Nigeria has customs and immigration services that are not famous for their ability to protect her borders against unauthorized entry of people and goods. This has made it impossible to control the entry of prohibited items. Without further training and perhaps, outright reorganization, these Services may become the weak link that may expose Nigeria to the dangers of dumping inherent in poor implementation of the Rules of Origin under AfCFTA. Improvement in the infrastructure necessary to detect and arrest criminals making business across the borders, and improvement in the efficiency of port services should be important agenda items.