Lessons from the African Continental Free Trade Area

Oshodi, Lagos. Photo: dotun55 (CC BY-SA 2.0)

The operational phase of the African Continental Free Trade Area (AfCFTA) was launched last week. This is a critical move for Africa as it constitutes a significant vote of confidence in its economic potential, while other regions and countries are engaged in a trade war.

It is a clear message for the entire world in favour of international cooperation at a moment where the main global players embraced mercantilism and unilateral approaches.

Africa is likely to be the most economically dynamic continent in the coming decades. It will be the most populated region. Also, the income per head is expected to rise as its economies transform; five of the top ten growing economies in 2018 were African. This presents substantial opportunities for increasing and diversifying trade and investment.

Supporting the African integration process

The AfCFTA constitutes a first mover advantage that African countries take to exploit their potential. Before any other region, Africa decides to lead. ODI has been working in partnership with the African Union and the UN Economic Commission for Africa to develop and conduct research that supports the African integration process.

The AfCFTA aims to increase the low intra-African trade, currently around 17%, lower than the 59% observed in Asia, by removing tariff and other barriers on trade on goods and services.

It also wants, in the second phase of the negotiations, to introduce provisions to increase intra-African investment, the protection of property rights and to eliminate unfair competition practices. By doing this, African countries aim to create the conditions to diversify exports away from the current unstable commodities.

All African countries, apart from Eritrea, have now signed the AfCFTA. The recent endorsement by the largest economy in Africa, Nigeria, provides more support to the agreement. There is virtually complete African support to the process. Moreover, this is also signalling a move towards a more open and competitive economy for Nigeria.

The process is far from over. Even if the implementation of the agreement takes 10 or 15 years, the African integration process will take longer. The path towards delivery will have its challenges.

The AfCFTA will remove a series of institutional hurdles, but it will not reduce by itself the high transport and logistics barriers, and production constraints that affect trade in the continent. Although it may facilitate the solutions, Africa will need to attract substantial investment to address these serious bottlenecks.

Flexibility and investment can help overcome the challenges

Even though Africa has a clear vision of where it wants to go, it needs to allow sufficient flexibility on objectives and tools. For example, digitalisation and other technologies require a view of economic transformation that is not limited to industrialisation, but that includes the modernisation of the services and agriculture.

Of course, there are risks. While increasing intra-Africa trade will facilitate diversification and economic transformation, it must be achieved without lifting trade and investment restrictions against the rest of the world.

On one side, the global competitiveness of African firms and products will depend on having access to the most cost-effective services and products. On the other side, Africa requires significant volumes of investment, and the intra-African investment will not be enough.

African integration must be supported. It constitutes an important step in economic development and, consequently, in the reduction of poverty in the continent. The world must look strategically towards Africa, looking at its economic potential and seeking to make mutually beneficial deals. Trade, investment and development assistance must work together to improve channels between donors and Africa.

Africa is getting it right. The AfCFTA will give African countries preferential access to the most economically dynamic region. A sharp contrast of what is happening in other parts of the world where barriers are being raised and countries aim to abandon a successful integration process.