African heads of state have gathered in Kigali, Rwanda, to sign a free trade agreement that would result in the largest free trade area in terms of participating countries since the formation of the World Trade Organization.
Leaders are poised to approve the African Continental Free Trade Area, a deal that will unite the 55 member countries of the African Union in tariff-free trade.
The agreement is touted by the African Union as encompassing a market of 1.2 billion people, and a gross domestic product of $2.5 trillion. It is hoped that it will encourage Africa’s trade to diversify away from its traditional commodity exports outside of the continent, the volatile prices of which have hurt the economies of many countries.
“Less than 20 percent of Africa’s trade is internal,” Rwandan President Paul Kagame, also currently chairperson of the African Union, said in a speech Tuesday. “Increasing intra-African trade, however, does not mean doing less business with the rest of the world.”
But, the deal has its critics. It was announced over the weekend that Nigerian President Muhammadu Buhari would not be attending the summit, despite his federal cabinet last week approving the deal. “This is to allow more time for input from Nigerian stakeholders,” said an official statement from the foreign ministry.
As of last week, there is a new global trade player, the African Continental Free Trade Area (AfCFTA). On Mar. 21, 44 African heads of state and government officials met in Kigali, Rwanda, to sign the framework to establish this initiative of the African Union.
The AfCFTA will come into effect 30 days after ratification by the parliaments of at least 22 countries. Each country has 120 days after signing the framework to ratify.
This will be one of the world’s largest free-trade areas in terms of the number of countries, covering more than 1.2 billion people and over $4 trillion in combined consumer and business spending if all 55 countries join. Here are four things you need to know about the AfCFTA.
1) What is the AfCFTA and how did it come about?
It creates a single continental market for goods and services as well as a customs union with free movement of capital and business travelers. The African Union agreed in January 2012 to develop the AfCFTA. It took eight rounds of negotiations, beginning in 2015 and lasting until December 2017, to reach agreement.
The A.U. and its member countries hope the AfCFTA will accelerate continental integration and address the overlapping membership of the continent’s regional economic communities (RECs). Many African countries belong to multiple RECs, which tends to limit the efficiency and effectiveness of these organizations.
The East African Community and the Economic Community of West African States have made some progress toward achieving subregional economic integration. But most RECs are underperforming, with a low level of compliance by member states, which has delayed successful integration.
2) What will the AfCFTA do, exactly?
One of its central goals is to boost African economies by harmonizing trade liberalization across subregions and at the continental level. As a part of the AfCFTA, countries have committed to remove tariffs on 90 percent of goods. According to the U.N. Economic Commission on Africa, intra-African trade is likely to increase by 52.3 percent under the AfCFTA and will double upon the further removal of non-tariff barriers.
By promoting intra-African trade, the AfCFTA will also foster a more competitive manufacturing sector and promote economic diversification. The removal of tariffs will create a continental market that allows companies to benefit from the economies of scale.
Countries, in turn, are likely to be able to accelerate their industrial development. By 2030, Africa may emerge as a $2.5 trillion potential market for household consumption and $4.2 trillion for business-to-business consumption.
Who stands to gain the most? African nations with large manufacturing bases, such as South Africa, Kenya and Egypt, would receive the most rapid benefits.
3) What key challenges lie ahead for the AfCFTA?
The A.U. hopes to create a single common market embracing all countries in Africa. However, only 44 countries have signed the AfCFTA’s establishing framework to date. And just 30 nations have signed the Free Movement Protocol — signifying the free movement of people, right of residence and right of establishment.
The most prominent non-signatory of the AfCFTA is Nigeria, which has one of the largest economies in Africa. Nigerian President Muhammadu Buhari justified his decision by claiming that he needed more time to consult with unions and businesses to assess the risks an open market would pose to his country’s manufacturing and small-business sector. Buhari may be cautious, but it’s very likely that the prospect of a continent-wide market eventually will prompt Nigeria to join the AfCFTA.
The AfCFTA also faces the difficult task of fostering cooperation among a multitude of national and regional actors with trade interests that will diverge at times. I discuss these challenges in my book, “Innovating Development Strategies in Africa: The Role of International, Regional and National Actors,” where I argue that ensuring each country benefits and establishing strong compliance mechanisms are critical to success.
[How much have development strategies changed in Africa since independence? It depends.]
The heterogeneous size of African economies, the existence of numerous bilateral trade agreements with the rest of the world, overlapping REC memberships, divergent levels of industrial development and varying degrees of openness also pose challenges to the AfCFTA.
4) So what’s next?
African leaders have agreed to have the AfCFTA come into effect within 18 months. For this to occur, at least 22 countries must ratify the agreement formally. Some countries, such as South Africa (which has yet to sign on but is considering it), say the time frame may be too short, especially given the need for debate and negotiations within each signatory nation.
Countries and RECs still have to complete negotiations on competition, dispute-resolution mechanisms, intellectual property rights and investments, among other issues. They should also agree on regulatory frameworks for service-trade liberalization (to facilitate market access), submit tariff concessions schedules for trade in goods (specifying the timeline and nature of products that will be liberalized) and make progress in signing of the free-movement protocol.
The final critical steps for the African Union will be to persuade the remaining countries to join, to create a secretariat to coordinate the implementation and to provide enough resources to ensure the AfCFTA’s success.
The agreement is opposed by the Nigeria Labour Congress, an umbrella organization for trade unions in the country.
“Given the size of its economy, population, and given its political clout, Nigeria’s stance towards the African Continental Free Trade Area is key,” Imad Mesdoua, senior consultant for Africa at Control Risks, a global risk consultancy with offices in Lagos, told CNBC via email. Nigeria is the continent’s most populous nation and considered by some metrics to be sub-Saharan Africa’s largest economy.
“There is a general sentiment among (labor unions and industry bodies) that Nigeria’s export capacity in non-oil sectors isn’t sufficiently robust yet to expose itself to external competition,” Mesdoua said.
The president of Uganda, Yoweri Museveni, also called off his visit at the last minute, although it remains unclear as to why.
Africa’s population is expected to reach 2.5 billion by 2050, according to the African Union. By this time it will account for 26 percent of the world’s working age population. Talks for the African Continental Free Trade Area began in June 2015.
Should the agreement be signed, second phase talks are expected to begin later this year. These will focus on investment, competition and intellectual property rights.
According to a study published by the United Nations last month, the deal will lead to long-term welfare gains of approximately $16.1 billion, after a calculated $4.1 billion in tariff revenue losses. But, the report did warn that benefits and costs might not be distributed evenly across the African continent.
In principle, a free trade area across Africa “makes perfect economic sense,” Ben Payton, head of Africa at risk consultancy Verisk Maplecroft, told CNBC via email.
But, he added: “The biggest risk is that African countries would be unable to effectively enforce external customs controls. For example, this would mean cheap Chinese goods that are imported into Ghana could eventually cross various African borders without further controls and make it into Nigeria. This problem already exists, but a free trade area would potentially make it worse.”
The World Trade Organization was formed in 1995 and comprises of 164 members.