HomeAnalysisAn overview of Africa’s free trade area dream

An overview of Africa’s free trade area dream

African leaders, except for Nigeria and few other countries, have signed an agreement to set up a massive free trade area to improve regional integration and boost economic growth across the continent.

Financial Matters with Tinashe Kaduwo

The deal to create the African Continental Free Trade Area (AfCFTA) was signed at an extraordinary summit in Kigali, Rwanda, by representatives of 44 of the 55 African Union (AU) member states. This free trade deal brings together about 1,2 billion people with a combined gross domestic product (GDP) of more than US$2 trillion.

The AfCFTA agreement commits countries to removing tariffs on 90% of goods, with 10% of “sensitive items” to be phased in later. It also liberalise services and aims to tackle non-tariff barriers which hamper trade between African countries, such as long delays at the border. Prospects are that free movement of people and even a single currency could become part of the free trade area as the case with the European Union (EU).

A single continental market for goods and services is beneficial to the continent which has long been lagging behind in terms of development as it boosts trade between African countries. Poor intra-African trade to some extent has slowed the development of the continent. Most continents that have enjoyed huge growth and development have been a result of strong intra-trade. UNCTAD, the main UN body dealing with trade in its latest report puts intra-African trade at 10,2% of the continent’s total trade. Between 2010 and 2015, fuels represented more than half of Africa’s exports to non-African countries, while manufactured goods made up only 18% of exports to the rest of the world, according to trade experts.

However, the absence of Nigeria in the agreement is worrying and may derail full implementation of the agreement. In a statement, Africa’s largest economy’s President Muhammadu Buhari said the decision was made to allow time for broader consultations. However, reports suggest that the Nigerian Labour Congress (NLC) had warned Buhari against signing the agreement, calling it a “renewed, extremely dangerous and radioactive neo-liberal policy initiative”.

Generally, not all countries benefit from a free trade area. Economic unions normally favour strong and advanced economies at the expense poor economies. In the EU for example, German and France which are relatively bigger and stronger to some extent have benefited from the EU at the expense of weaker economies such as Greece, Portugal and Italy.

A research by UNCTAD suggest that elimination of all tariffs between African countries would take an annual US$4,1 billion out of the trading states’ coffers, but would create an overall annual welfare gain of US$16,1 billion in the long run.

However, there are fears that the benefits of the free trade area could be unevenly distributed. Africa’s most advanced countries are at an advantage with their more strongly developed manufacturing capabilities. Allowing them to sell their goods and services to the continent’s less developed countries could undercut industrial development there. Zimbabwe, for example, still needs protectionist policies to nurture its manufacturing sector. Currently, Zimbabwe’s manufacturing sector is struggling due to influx of cheaper competing imports. Opening up borders and removing trade barriers will worsen Zimbabwe’s economic situation.

To counter the negative effects, Zimbabwe needs to build on productive capacities. The AfCFTA implies liberalisation. Countries that are competitive in terms of production are likely to benefit more and that will be a big blow to those countries that are still building their productive industries. Attention is therefore needed on the impact of the agreement to the big economies against the small economies and dominant sectors against the weaker sectors.

Pan African banks are expected to fuel Africa’s intra-trade dream and are also expected to be the major beneficiaries of the trade agreement. Their growth will bring new opportunities and benefits to the African continent. As financial intermediaries, they are expected to cement economic integration within Africa, support financial inclusion and give rise to greater economies of scale. Standard Bank, Ecobank and Nedbank are among pan-African banks that have presence in Zimbabwe and are becoming the lead arrangers of syndicated loans and financiers of cross border trade.

Kaduwo is an economist at Econometer Global Capital. — tkaduwo@econometerglobalcapital.com or kaduwot@gmail.com.

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