The African Continental Free Trade Agreement has the potential to establish a market of 1.2 billion people with a combined economic production of US$2.5 trillion. This is an exciting prospect for a region that has been striving for greater integration for a long time.
Trade integration can help propel development and has prompted success stories in other regions. The momentum for the agreement to become a reality has been strong. About a year since its launch in Kigali in March 2018, 52 out of 55 countries on the continent have signed the agreement and 22 have already ratified it which means that the threshold for the agreement to take effect has been met.
What does this mean for the countries that are part of the agreement?
The promise of closer trade integration is that it is a driver of economic transformation, delivering higher growth and more jobs. A large free trade area in Africa would provide a single market for goods and services, help spread knowledge and technology and facilitate the development of regional supply chains. It would also better position African countries to be part of global supply chains and offer large opportunities for companies from other regions to invest in domestic markets.
Intraregional trade in Africa has expanded rapidly, particularly between countries in sub-regional economic communities which essentially have near-zero preferential tariffs. For example, three quarters of African intraregional trade took place within these sub-regional communities. In the process, regional trade hubs emerged such as Cote d’Ivoire, Kenya, Senegal and South Africa.
Unlike exports to the rest of the world, intraregional trade is more diversified and contains higher value-added goods, including a sizable share of manufactured products. The data is quite striking. 75 percent of Africa’s total exports to the rest of the world are minerals such as crude oil, while 40 percent of intra-regional trade is accounted for by manufactured goods.
Removing barriers to trade will impact countries and people within countries differently. Opportunities to expand regional trade are sizable across all sectors of the economy including agriculture-related commodities, manufacturing, and services.
It is important to acknowledge that these potential benefits also come with costs. Inequality may increase, particularly in countries with more diversified economies and large shares of skilled labor. However, these effects can be offset through active labor market programs such as training and job-search assistance, and measures that bolster safety nets (income support and social insurance programs).
As with all policies, the overall impact needs to be assessed on a country by country basis and complementary policies will be needed to maximize the benefits. This requires giving adequate time to consult with the key players affected and devising suitable supportive policies as needed.
An important set of supportive policies for countries to benefit more fully from the trade agreement includes investing in infrastructure to better connect internal markets and improving trade logistics. In addition, lowering trade tariffs will also lower fiscal revenues. The impact appears to be limited in most countries, but a few countries that still apply high import tariffs will have to look for alternative revenue sources.
Overall, while some details such as rules of origin or local content still need to be worked out, the African Continental Free Trade Agreement could be an important catalyst for growth and structural transformation across the continent.
At a time when the youth population is growing rapidly and the pressure to create jobs is high, boosting intra-regional trade is a valuable opportunity that should not be missed.