Africa: The African Continental Free Trade Area (AfCFTA) and what it means for the continent

5 Min Read

The African continent made a major historic move towards a long-held dream of economic integration spearheaded by the African Union on the 21st of March 2018 when 44 leaders signed an agreement to create the African Continental Free Trade Area (AfCFTA) at a ceremony in Kigali, Rwanda.

The formation of this free trade area in Africa If ratified by all the 44 countries will become one of the world’s largest trading blocs and will create a single market of 1.2 billion people with a combined gross domestic product of more than $2 trillion. One of the key players who offered support to ensure the conceptualization of this continental agreement, United Nations Conference on Trade and Development (UNCTAD) states that cutting intra-African tariffs could bring $3.6 billion in welfare gains to the continent through a boost in production and cheaper goods. This lacked before when the continent had three separate trading bloc; Common Market for Eastern & Southern Africa (COMESA), Southern African Development Community (SADC) and, the East African Community (EAC).

However, key players and the continents largest economies, South Africa and Nigeria were missing raising concerns about the pact; the two represent $700 billion — or one-third — of the $2.1 trillion in gross domestic product across all the 55 African countries. They argued they were still conducting internal negotiations on some protocols in the pact.

This agreement is also part of the AU’s Agenda 2063, a long-term plan for continent-wide political, social and economic integration and development and critics argue the single trading bloc will not work where individual sub-regional ones have failed but will rather build on previous trade gains and will result in the whole being larger than the sum of its parts.

Key Benefits

The pact will benefit Africa in at least six mutually reinforcing ways. First, it will generate the momentum for the creation of similar arrangements for the 11 countries (including two leading economies, Nigeria and South Africa).  It is also a much larger market whose free flow of goods and services will help to maintain economic growth at over 7 percent per year. At this rate, the combined Gross Domestic Product (GDP) of Africa is projected to reach $29 trillion by 2050, which would be equal to the current combined GDP of the EU and the US. With additional policies, such growth will contribute significantly to spreading prosperity and reducing poverty.

Additionally, the treaty will serve as an impetus for investment in Africa’s cross-border infrastructure. It is estimated that Africa needs to invest nearly $100 billion annually in infrastructure over the next decade. Less than half of this target is met currently. Also, the prospects for the larger markets and supporting infrastructure will spur industrial development.

This will not only create jobs but it will also have the added advantage of diversifying Africa’s economies that are largely dependent on raw materials. The associated technological development will lead to the creation of new industries.

Also, the signal of larger markets will help to stimulate trade in services. The first beneficiary is likely to be the financial sector, which will be able to lend to larger industrialists seeking to benefit from economies of scale. Such financial services will reinforce the increase in cross-border investments by emerging African firms that are serving as regional champions of industrial development.

By being part of larger markets, small African countries will no longer be restricted to producing their traditional products. With better policies and human resources, they can become the locus of new manufacturing operations that serve wider markets and finally by providing a single economic space with harmonized trade policies and a regulatory framework, the AfCFTA solves the problem of multiple memberships, rationalizes trade negotiations, reduces the cost of doing business, supports industrialization, and stimulates cross-border infrastructure projects.