On 7th July, Africa’s largest economy Nigeria, signed the African Continental Free Trade Agreement (AfCFTA). Nigeria’s signature brought the number of countries who have signed the agreement to 54. In this article, we examine the necessity of the agreement for Africa’s economic future.
What is a Free Trade Agreement?
Free trade areas are regions comprising different countries that have signed a free trade agreement and place little or no restrictions in form of tariffs or quotas among each other. This allows the countries who are part of the agreement to freely trade among each other. The trade pact that establishes this is called a Free Trade Agreement.
Existing Agreements
Free-trade areas are not new to Africa. They typically involve some level of cooperation between countries - agreeing to lower barriers to trade between them to increase the movement of goods and services.
Africa already has some free trade agreements in place.
Southern African Customs Union: The SACU, established in 1889, is the oldest customs union in the world and comprises of 5 members from Southern Africa.
West African and Monetary Union(WAMU): An organisation of 8 mainly francophone West African states within the Economic Community of West African States. UEMOA(the french name) sought to protect smaller countries from heavyweights like Ghana and Nigeria. The UEMOA created the CFA Franc, the currency that’s used in eight West African Countries.
West African Monetary Zone(WAMZ): 6 countries within ECOWAS have planned to introduce a common currency, Eco. Eco hopes to rival the CFA Franc and eventually integrate its member countries into the WAMZ.
Southern African Development Community Free Trade Area(SADC FTA): The SADC FTA was established in 2008 and includes 16 Southern African states.
Common Market for Eastern and Southern Africa: COMESA includes 21 member states from North Africa, East Africa, Africa’s Island nations and South Africa. COMESA was formed in 1994.
East African Community: The EAC was revived in 2000 and comprises of 6 member states from East Africa. It has expanded its free trade agreement to include members COMESA and SADC.
Now for the Big One - What is the AfCFTA?
AfCFTA is the African Continental Free Trade Agreement to create the African Continental Free Trade Area. The agreement requires member states to remove tariffs from 90% of goods thus allowing the free movement of goods and services within Africa.
Trade Without Borders: A timeline
1963: The Organisation of African Unity(OAU) was founded to encourage cooperation among the member states.
1980: The Lagos Plan of Action was adopted to support intra-african trade to reduce reliance on the West.
1991: The Abuja treaty was signed creating the Africa Economic Community - an organisation which encouraged free trade areas, a single market, an African Central Bank and a common currency.
2002: The African Union(AU) succeeded the OAU. Its mission is “An efficient and value-adding institution driving the African integration and development process in close collaboration with African Union Member States, the Regional Economic Communities and African citizens”
2012: At the AU Summit in Addis Ababa, African Union leaders agreed to create a new Continental Free Trade Area by 2017.
2015: At the AU Summit in Johannesburg, AU leaders and member states began negotiations. Their negotiations lasted 3 years.
March 2018: 44 countries sign the AfCFTA at the Africa Union summit in Kigali, Rwanda
April 2019: 22 member states ratify the agreement for the free trade area to formally exist.
July 2019: Nigeria and Benin sign the agreement, moving the AfCFTA into the operational phase.
What Problems does the AfCFTA Solve?
African businesses face higher tariffs to export within Africa than exporting outside it. The African Union puts this at an average tariff of 6.1%. The AfCFTA seeks to eliminate tariffs on these exports so that Africans can trade within the continent. This agreement has the potential to increase intra-African trade by 52.3%.
African exports can be placed into 2 camps.
- Extractive Exports(like oil and minerals)
- Non-Extractive Exports(like finished goods and machine parts)
Much of Africa’s economy relies on extractive exports outside the continent. The prices of these commodities are volatile, resulting in several recessions and economic instability across the continent. AfCFTA seeks to encourage the production of non-extractive exports by opening up the entire continent as a market for these goods.
Extractive exports are also less labour-intensive than non-extractive exports. The AfCFTA by encouraging more non-extractive exports, hopes to create jobs in the manufacturing and agricultural sectors.
Here’s a breakdown of African exports by the International Monetary Fund.
What’s in it for African Businesses?
Businesses in Africa often struggle to expand into western markets for several reasons. Due to local knowledge, strong networks and expertise, these businesses are poised to take advantage of the AfCFTA by providing goods and services to a larger ‘home’ market. The AU hopes that afterwards, they are financially stronger and can then advance into foreign markets outside the continent. This means that companies can easily operate in different countries. It’s also hoped that the transport infrastructure that connects different countries, improves.
Fun Terms and Facts About AfCFTA. We’re just going to call these: FTFAfCFTA
- 22. Countries that ratified the agreement in 2018 . 22 is the benchmark number of states for the AfCFTA to come into effect.
- 27. Number of countries to ratify the agreement as at July 2019.
- Ratification: The term defines the act of member states filing instruments of agreement for a treaty. In many countries, ratification has to be authorised by the legislature
- 54. Countries who have signed the agreement. Nigeria and Benin are the 53rd and 54th countries to sign.
- Eritrea. The only African Union member state that has not signed the agreement. Eritrea is expected to sign soon.
- This is the world’s largest Free Trade Agreement. Ever.
What’s the future?
The AfCFTA is part of the AU’s 2063 Agenda for Africa. The short-term plan however, is to contribute to the United Nations’ 2030 Agenda for Sustainable Development Goals. The AU hopes this agreement will help solve the problems of economic growth, food security, affordable health services and promotion of industry. It also hopes that the continent can rely less on external resources.
Once the AfCFTA is signed, it means companies have a larger addressable market and can operate easily in various countries. It’s also hoped that the AfCFTA will improve the transportation network between African countries and make it easier for people and goods to move.
What do you think about the AfCFTA? Do you think that it’s a solid step towards building the future of Africa, or there’s more to be done? Let us know in the comments. If you have any insight, thoughts or opinions that you want to share with us, we’d love to hear from you. Please send an email to editor@future.africa.
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Further Reading On AfCFTA
AfCFTA: Questions and Answers - African Union
Africa’s free trade agreement - curse or blessing? - Mail & Guardian
Economic ‘Game Changer?’ - Africa’s leaders launch free trade zone - Aljazeera
Understanding the African Continental Free Trade Area - Premium Times
