The African Continental Free Trade Area (AfCFTA) is a free trade area deal created across the entire African continent. It is a $3.4 trillion intra-continental trade bloc, which according to analysts, could become the world’s biggest trade block. AfCFTA brings together the tripartite free trade area, which is to include the Common Market for Eastern and Southern Africa (COMESA), the East African Community (EAC) and the Southern African Development Community ( SADC), together with the Economic Community of Central African States (ECCAS), the Economic Community of West African States(ECOWAS), the Arab Maghreb Union and the Community of Sub-Saharan States. The objective of the project is to eventually integrate all 55 States of the African Union into the free trade area.
According to the agreement establishing the AfCFTA, the core 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, facilitating investment
- move towards the establishment of a future continental customs union
- achieve sustainable and inclusive socio-economic development, gender equality and structural transformations within member states
- enhance the competitiveness of member states within Africa and in the global market
- encourage industrial development through diversification and regional value chain development, agricultural development and food security
- resolve challenges of multiple and overlapping memberships
What the rule of origin says is that the goods that will be traded under AfCFTA are goods that are produced within the countries that sign the agreement or goods that have substantial local content.— Dr Muda Yusuf
How does Africa stand to gain from AfCFTA?
One important benefit of the AfCFTA is the cut down on tariffs on 90 percent of goods traded across the continent. The UN Economic Commission for Africa (UNECA) estimated that such a move could increase intra-African trade by 52 percent in less than five years.
The continent has some catching up to do in this respect: intra-African exports made up only 17 percent of total trade in 2017, compared to 59 percent and 69 percent for intra-Asia and intra-Europe trade respectively.
For African-owned companies, the agreement will make new markets more accessible within the region. Tapping on the AfCFTA can help companies grow their customer base and diversify, both by export destination and the type of goods produced.
“The agreement opens the door to the creation of more efficient regional supply chains which, in turn, would promote investment, growth, and job creation in Africa,” commented Amadou Diallo, CEO, DHL Global Forwarding, Middle East and Africa.
Reduced input costs will be another significant advantage. The AfCFTA will make it easier for companies to import raw materials from other resource-rich countries within Africa. It will also ease the process of setting up assembly firms in other countries to access cheaper means of production and thus improve their bottom lines.
In the long term, the AfCFTA is also expected to boost economic growth across the continent. On average, manufacturing represents only about 10 per cent of the total GDP in Africa currently — well below the figure in other developing regions.
A thriving continental free trade area could give countries an incentive to transform their commodities into manufactured goods, and thus reduce this gap. A more significant manufacturing sector would also lead companies to create more well-paid jobs and help alleviate poverty in Africa.
When did Buhari sign African Continental Free Trade Area?
Following a protracted criticism, Nigeria’s president, Muhamadu Buhari on July 7, 2019, signed the African Continental Free Trade Agreement (AfCFTA). This is said to be a key move for the ambitions of the African Continental Free Trade Area (AfCFTA) given Nigeria’s status not just as one of the continent’s largest economies but also as its most populous country.
Buhari appended his signature at the African Union summit in Niamey, about one year and six months before AfCFTA eventually became effective on January 1, 2021.
How will AfCTA benefit Africa?
For Africa, the benefits are considerable. The AfCFTA would:
- cover a market of 1.2 billion Africans with a combined GDP of US$2.5 trillion.
- would increase intra-African trade by up to 52.3%
- enable all AU countries to share in the welfare gains, which are estimated at around 2.64% of continental GDP – roughly $65 billion in 2018 terms.
- increase real wages for unskilled workers in the agricultural and nonagricultural sectors, as well as for skilled workers, with a small shift in employment expected from agricultural to non-agricultural sectors.
- be accompanied by additional dynamic benefits, notably, export diversification, durable sustained growth, an enlarged regional market that better attracts FDI, with wider economic space for industrialization and catalytic effects for structural transformation.
- expand the size of Africa’s economy to US$29 trillion by 2050, as estimated by the United Nations Economic Commission for Africa.
How will AfCTA benefit Nigeria?
Coming to Nigeria, the gains are evidential. The AfCFTA would:
- expand market access for Nigeria’s exporters of goods and services, spur growth and boost job creation.
- eliminate barriers against Nigeria’s products.
- provide a Dispute Settlement Mechanism for stopping the hostile and discriminatory treatment directed against Nigerian natural and corporate business persons in other African countries.
- establish rules-based trade governance in intra-African trade to invoke trade remedies, safeguard the Nigerian economy from dumping and unfair trade practices;
- support the industrial policy of Nigeria through the negotiated and agreed “Exclusion and Sensitive category lists” to provide space for Nigeria’s infant industries.
- improve competitiveness and the ease of doing business.
- provide a platform for Nigeria’s continued leadership role in Africa.
- consolidate and expand Nigeria’s position as the number 1 economy in Africa.
- stimulate, specifically, an estimated 8.18 percent increase in Nigeria’s total exports, with a small structural shift in Nigeria’s economy towards manufacturing and services. This is expected to lead to a total increase in Nigerian economic welfare by 0.62% – equivalent to around US$2.9 billion in 2018 terms. Changes would result from tariff reduction, ease of doing business and, trade facilitation.
- provide a platform for Small and Medium Enterprises (SMEs) integration into the regional economy and accelerate women’s empowerment.
- provide an expanded platform for Nigerian manufacturers and service providers for connection to regional and continental value chains
How ready is Nigeria to take advantage of the AfCFTA Agreement?
Judging from obvious pointers, Nigeria may not be ready yet to take full advantage of the AfCFTA benefits. According to Lagos Chambers of Commerce & Industry (LCCI), Dr Muda Yusuf, Nigeria’s unpreparedness is due to some factors such as the infrastructural deficit, quality and high cost of production as well as poor policy environment.
Citing diverse challenges associated with the African biggest economy, the LCCI boss argued that it would take some time for the AfCFTA to take shape due to what he ascribed to the issue of readiness first on the part of economic players who cannot produce and the capacity to produce competitively. Lack of this said competition will debar Nigeria from getting any serious value from the trade.
According to Yusuf, most manufacturing industries in the country survive largely on the back of our protectionist policies.
In other words, it is either we have very high tariffs or we have outright import bans to protect them. That is what is sustaining most of them, especially those that fall within the SME category.
“For multinationals and conglomerates, perhaps because of their sizes and economies of scale, the average costs will be much lower and they may be more competitive. For SMEs, there is a very high risk. That is the readiness on the part of the economic players.”
LCCI’s director-general, also, explained diverse constraints, which according to him, were connected to institutional readiness.
He noted that the institutional readiness “has to do with the readiness of the customs and all regulatory institutions. It is not clear how ready they are. We know the lag we have in terms of policy pronouncement and implementation.
He also expressed concern about the institutional capacity of African countries “to enforce the rules of origin. Among others, the rule of origin challenge is one of the biggest.
“What the rule of origin says is that the goods that will be traded under AfCFTA are goods that are produced within the countries that sign the agreement or goods that have substantial local content. We have a continent with weak institutions.
“A lot of these institutions compromise, not only in Nigeria but in other parts. They would bring goods from China and all sorts of places, repackage and present it as if it is from Africa. So, enforcing the rules of origin is a major challenge, which requires that institutions are ready.”
Experts have also expressed concern that Nigeria’s small and medium enterprises (SMEs) completely lacked the skills to be able to compete effectively. This can be attributed to weak infrastructure, particularly transport, energy and power infrastructure.