Free trade and flourishing economies?

A continent-wide free trade area for Africa can only be a good thing – if the governments of the continent can focus on the long-term benefits

The African Continental Free Trade Area (AfCFTA) agreement, signed by 44 African countries in Rwanda during March 2018 and ratified by 22 countries by April 2019, is expected to create the largest free trade area in Africa, and create a continental customs union.

Africa accounts for less than three percent of global trade and has been unsuccessful in facilitating and supporting cross-border trade to sustain the continent’s growth and economic development and, ultimately, integrate with the global economy.

However, this failure has not been the result of a lack of effort.

In recent decades, Africa has seen a surge of sub-regional agreements, including agreements creating the South African Development Community (SADC), the East African Community (EAC), the Economic Community of West African States (ECOWSA) and the Common Market for Eastern and Southern Africa (Comesa).

These agreements have been restricted to exclusive regions, limiting their benefits to those regions. These regional trade areas have generated concerns over the potential costs of the continent’s trading system and fragmentation into exclusive blocs, especially in light of Africa’s low intra-regional trade performance.

AfCFTA consolidates the Tripartite Free Trade Area and other regional free trade areas into one that covers a wide scope of formal trade measures. It puts in place the mechanisms to establish a continental free trade area and to establish a continental customs union – a single market for goods and services.

A continent-wide free trade area will give African countries specialising in particular goods a comparative advantage. It will improve the efficient use of productive resources and increase output. Removing trade barriers on imports will reduce import costs, in turn lowering consumer prices and giving consumers a larger variety of African products in a unified market.

Downstream manufacturers also stand to benefit by reduced production costs as the costs of importing raw materials would be lowered. This is likely to place competitive pressure on domestic producers as they will be required to improve their resource allocation and innovate to compete meaningfully in the liberalised trade environment.

The increased competitiveness of domestic producers is, in turn, likely to improve. This will position African economies to integrate into global value chains, an area in which African trade has played an insignificant role.

Concerns over state sovereignty means African countries have always experienced constrained access to neighbouring markets, which has hindered domestic growth. AfCFTA offers domestic firms the opportunity to be liberated from local market constraints created by intra-regional trade barriers. This will improve growth prospects and allow domestic firms and their wider economies to access finance and technology in the global economy.

Unfortunately, economies of many African countries rely on a single commodity or industry for the bulk of their gross domestic product (GDP) and tax revenue. Based on the experience of regional trading blocs like SADC, the biggest challenge AfCFTA will face is resistance from individual states and industries to lower tariffs as they try and protect their dominant revenue sources.

Hopefully, this challenge will be overcome by the recognition of the long-term benefits of the potential growth produced by AfCFTA.