BusinessDay
Nigeria's leading finance and market intelligence news report.

Revisiting the African Continental Free Trade Area: Impact, challenges and opportunities

Trade is one of the key factors responsible for interaction among nation-states. It involves goods and services, and connects communities, countries and continents. Essentially, a free trade area is a geographical area where there are no import tariffs between or among the countries that have signed a free trade agreement. The importance of a free trade agreement cannot be over-emphasised – it enables resources to be pooled from where they are abundant to where they are mostly needed, encourages foreign direct investment and serves to cement regional integration.

There are a number of free trade agreements around the world – the North-American Free Trade Agreement (NAFTA) initially conceived between the USA, Mexico and Canada; the EU-Canada Free Trade Agreement; the EU-Japanese Free Trade Agreement; the US-South Korea Free Trade Agreement and the European Free Trade Association. The popularity and global acceptance underscore the advantages of Free Trade Agreements… Apart from the removal of tariff and non-tariff barriers to trade, the advantages of free trade are enormous – significantly reduced cost of products and services which benefits countries with lower income, , improves the ability to compete, increases real consumer income, thus propelling increased demand and consumption.

Since attaining political independence, African countries have struggled with one challenge to another. These challenges see many countries in Africa dealing with high poverty levels and underdevelopment which continue to fuel conflict and reduced life expectancy on the continent. Several initiatives have been taken to jumpstart the continent’s development – from the Lagos Plan of Action signed in 1980 to the New Partnership for Africa’s Development (NEPAD), which was adopted in 2001 at the 37th Summit of the Organization for African Unity and ratified by the African Union (AU) in 2002. Several years after, NEPAD is still crawling and unable to walk its way to achieving the vision of its founders.

Africa leaders have however continued to be relentless in the pursuit of a cooperative economic model that would benefit member states and launch the continent on the path of economic advancement and sustainability. These efforts culminated in the drafting of the African Continental Free Trade Agreement (AfCFTA) by 44 African countries in Kigali, Rwanda on March 21, 2018. The AfCFTA required signatories to remove tariffs from 90 percent of goods, and allow the free flow of services, commodities, and food across Africa.

The general objectives of the agreement are to: create a single market, deepening the economic integration of the continent; establish a liberalised market through multiple rounds of negotiations; aid the movement of capital and people, facilitate investment; move towards the establishment of a future continental customs union; achieve sustainable and inclusive socio-economic development, gender equality and structural transformation within member states; enhance competitiveness of member states within Africa and in the global market; amongst others.

AfCFTA is definitely the largest free trade area established in terms of the number of participating countries since the formation of the World Trade Organization. If successfully implemented, the enormous market in African could make the continent a formidable force to be reckoned with in international trade negotiation, and enable the continent negotiate favourable terms of trade with the rest of the world on a continental as opposed to a single state level.

It is however uncertain that the disposition of some of the member countries would allow the free trade area to engender the much-needed economic development in Africa. The political instability in not a few African countries, insecurity arising from insurgency and the internal squabbles for power continue to undermine the ability to meet the objectives of AfCFTA. It is widely believed that Africans would depend much less on the rest of the world if they traded internally amongst themselves. However, the socio-political situation in some member countries creates undesired stumbling blocks to the achievement of this noble objective.

Another major drawback in the implementation of the AfCFTA is the challenges it would likely pose to indigenous industries, given the intensity of competition that would be occasioned by the removal of trade tariffs and the inflow of cheaper foreign goods and services. Also, the absence of comparative advantage among African economies is bound to limit the impact of the Free Trade Area. For a free trade area to be effective, participating countries need to produce goods that have a lower opportunity cost than their trading partners and seek to trade other goods for which they lack opportunity cost.

As African economies are producers of raw materials and lack the industrial capacity to transform their mineral resources into manufactured goods– this poses a great challenge in the free trade area. Worthy of mention also is the likely threat from foreign companies who have access to better technology and the ability to produce goods cheaper, with possible adverse effect on local small, medium enterprise that would be most certainly unable to meet the ensuing competition.

To meet the desired objectives, it is important that the implementation of the AfCFTA is complemented by political stability in all African nations through the elimination of greed for power and enthroning truly democratic systems of government. Corruption should also be tackled internally by the respective member nations as its persistence poses a great danger to the realisation of the objectives of the free trade arrangement. The agreement itself should be implemented in a way that it would not stifle local SMEs which are the backbone of many national economies. Incentives should be put in place to enable such companies’ holdup against competition that is likely to ensue from wholesale implementation of the agreement.

No less important is the need for African nations to adequately prepare for stiff competition from the rest of the world as they seek to dispose of their goods and services. One sure way of preparing for this is for Africans to be resolute on affording preferential treatment to goods and services emanating from member countries and the pursuit of industrialisation to guarantee favourable economies of scale in the production value chain and thus cheaper goods and services for the citizens of the continent. These measures should be complemented with the whole scale upgrades to infrastructural architecture of member countries to not only support competitive production of goods and services, but such infrastructure that will support ease of movement between participating countries.

Ozor is a Partner at DCSL Law. Kindly forward comments and reactions to cozor@dcsl.com.ng.

Get real time updates directly on you device, subscribe now.