Africa's new free trade area is promising, yet full of hurdles

The African Union has launched the operational phase of the Africa Continental Free Trade Area (AfCFTA), which will be the world's largest free trade area by number of countries once it’s fully up and running.

After years of talks, the goal is to establish a single market for goods and services across 54 countries, allow the free movement of business travellers and investments, and create a continental customs union to streamline trade - and attract long-term investment.

The agreement is seen critical for growth and job creation for Africa and its 1.27 billion people. Clinching Nigeria's agreement and moving into the operational phase this July was a significant step:

“We now have leaders of 54 countries putting their neck on the line for this agreement. It’s a game-changer. There’s much more political energy today than there has ever been on integration,” said Arancha Gonzalez Laya, Executive Director of the International Trade Centre (ITC). She was speaking during a session at the World Economic Forum on Africa, developed with the Forum's Platform for Shaping the Future of International Trade and Investment.

Intra-Africa trade has been historically low. Intra-African exports were 16.6% of total exports in 2017, compared with 68% in Europe and 59% in Asia, pointing to untapped potential.

It will be a challenge to make way for easy and quick facilitation of people and goods in Africa because there is so much fragmentation, with economies at widely varying stages of development, experts speaking at the session noted. While the reality is there will most likely be winners and losers, the role of the African Union will be to ensure shared prosperity on the continent, creating supportive policies, eliminating monopolies, and stamping out uncompetitive behaviour.

The takeaway from the session: AfCFTA is an opportunity for countries and companies to help each other grow, as they have done in other regions. But trade liberalization has the potential to damage the poorest within those countries, which is why it is so important to have supportive policies. The speakers laid out several challenges and solutions.

Infrastructure logjams and bureaucracy

While infrastructure has improved, there is still a long way to go to make trade easier between countries. You can’t build a value chain across the continent when there are countless customs stamps, customs signatures and certificates to simply move a container from one country to another. Logjams and bureaucracy must be reduced.

Harmonizing regulations

“We need one-stop border posts and common rules and harmonious regulations to ensure that the flow of goods happens far more quickly and easily. Standardization of regulations is going to be extremely important,” said Patrick Khulekani Dlamini, Chief Executive Officer and Managing Director of the Development Bank of Southern Africa.

The African Union gave assurances this would happen: “We have got a very aggressive programme of trade facilitation, so that we minimize the number of documents that have to be signed for goods and services across borders,” said Albert Mudenda Muchanga, Commissioner for Trade and Industry at the African Union Commission.

Avoiding protectionism

As global trade rules are being eroded in other regions, with China and the United States spiralling into a trade war and protectionism tightening its grip in many countries, Africa has the opportunity to create a trade buffer for itself. With all countries united in one giant bargaining unit, it will hold far more sway than before.

“Africa could stride onto the trade negotiation stage as one enormous market. This could lead to a new engine of growth across the continent,” said Ngaire Woods, Dean Blavatnik School of Government at the University of Oxford.

The continent will also be able to learn from the mistakes of other regions and start integration afresh, the speakers noted. Monitoring on a month-to-month basis will be important to see how barriers are being dismantled and where gaps remain.

As a whole, Africa needs to take several steps to boost trade, such as fostering skills for entrepreneurship and providing more access to credit and capital. Business and political leaders will need to think creatively about continental joint ventures to build strong production and manufacturing networks across the continent. But with collaboration, starting 1 July 2020, this giant African market has great potential to be a new engine of growth across the continent.