Max Mendez-Parra (ODI) | The African Continental Free Trade Area and economic transformation

Max Mendez-Parra  (Senior Research Fellow, ODI)

22 March 2018

African leaders gathered this week in Kigali to sign the African Continental Free Trade Area (AfCFTA). This is a key step in African efforts to eliminate barriers to trade among countries of the continent and will provide the foundations for smarter and deeper continental integration and implementation of the AU 2063 agenda.

Africa has followed a long road in its endeavours to promote regional integration, with mixed success. For example, the East African Community now constitutes the most successful model of integration on the continent, but other regional economic communities (RECs) have experienced more nuanced outcomes – and the EAC also had its challenges in the 1960s and 1970s. In addition, economic partnership agreements (EPAs) between African groups of countries and the EU have been a challenge to the African regional integration process, as EPAs cut across Africa and African regions.

The road to full implementation of the AfCTFA will be very long. Stage 1 of the negotiations seeks to establish a free trade area within Africa by liberalising nearly 90% of the goods within the continent. For some countries (e.g. Nigeria), reaching such a level of liberalisation constitutes a major effort. The agreement includes a services chapter, aimed at liberalising continental trade in services. This stage of the agreement will enter into force once 15 countries ratify it. It is unclear how long this process may take.

The second stage of the negotiations will aim to address deep integration issues such as investment and competition policies. Later on, there will be the possibility of forming a customs union, but at the moment a decision on this is not possible.

The AfCFTA is set within the aim of the AU and its member states to transform the economic structure of African countries and increase intra-African trade. Economic transformation and the creation of jobs is the most important economic development need in Africa today. Trade and trade facilitation is a key component of economic transformation strategies. Within economic transformation, the development and improvement of the manufacturing sector remains key, and trade can contribute to it. The AfCFTA could contribute to this goal by promoting regional value chains making use of expanded market access in the region.

The AfCFTA should be the basis for a wider and more comprehensive integration strategy. The AfCFTA is likely to be expanded to include additional trade and other cooperation provisions. In particular, the AfCFTA should be used to boost investment in the region to promote infrastructure development and, more importantly, the development of private sector capabilities. Such investment (as in the case of trade) should not be limited to intra-African opportunities; there should also be an effort to bring in capitals and capabilities from the rest of the world.

The AfCFTA on its own is not sufficient to guarantee the transformation process; two complementary factors are also crucial. First, African countries need to improve physical and digital connections among themselves. Without soft and hard infrastructure connecting African countries physically (and virtually), the AfCFTA will not be enough to generate needed trade.

Second, it is unlikely that the AfCFTA at this stage will generate substantial and effective market liberalisation immediately, as much of this has already been achieved through the multiple RECs. It may bring down existing high tariffs between countries that, given distance and lack of connectivity, will not trade even under low tariffs.

Third, Africa needs a substantive boost of investment in its productive capacities that the AfCFTA per se is not expected to bring. African countries need to develop their productive capacities to meet demand from other African countries.

Meanwhile, industrial strategies need to be developed at the national, regional and continental levels. There is a major risk that the AfCFTA will eliminate intra-continental barriers while raising trade barriers with third countries. This strategy, followed by Latin America in the 1960s, has proven extremely costly and inefficient in generating the needed economic transformation. This may harm consumers’ welfare as well as affecting the productivity and competitiveness of African firms. Trade liberalisation is welcomed even at a regional level; however, it needs to be harnessed within a wider and deeper strategy of integration of Africa into the world economy.

In this sense, we should not overestimate the benefits of the AfCFTA and we should not underplay the challenges. The AfCFTA should be a first step in a wider integration and industrialisation strategy. Trade must be considered a tool rather than as an end in itself. The end is to increase trade (regardless of the partner) and to transform African economies to create jobs and raise living standards sustainably. The AfCFTA is not the single most important of the policies that African countries will need to deploy to transform their economies – but it is an extremely welcome one.

In addition, the agreement should aim to promote economic transformation as well as African trade. In this sense, the aim to increase intra-African trade may be misleading, as what African needs is more trade regardless of the partner. Aiming to increase intra-African trade may lead to distortions that will make many sectors inefficient and not competitive.

All this calls to raise awareness of the work that is needed to make a success of the AfCFTA and avoid certain undesirable outcomes. The agreement requires not only more elements of deep integration but also addressing of many of the multiple barriers that affect trade and economic transformation (beyond trade policies at the border). The AfCFTA must thus be welcomed and celebrated as long as the continent is ready to take the necessary steps to make of it a tool to put Africa into the world economy.

Maximiliano Mendez-Parra is a Senior Research Fellow at ODI.

Photo credit: Jonathan Ernst/Reuters