Africa Is Set to Establish the World’s Largest Free-Trade Zone

By Luigi Wewege Friday, September 11, 2020

African leaders are working on creating the world’s biggest free-trade zone as trade tensions between the US, China, the UK, and Europe rise.

The African Union (AU) is spurring on discussions about the African Continental Free Trade Area which, if fully executed, could span a market with more than 1.2 billion people with a collective Gross Domestic Product (GDP) of $2.5 trillion.

The AU is determined to fast-track intra-African trade and improve Africa’s trading position significantly in the global market. They believe they can accomplish this by consolidating Africa’s common voice and its policy space in international trade discussions.

Which African Countries Are Part of the Free Trade Agreement?

The free trade agreement comprises almost all of the countries in the African continent. Out of the fifty-five nations recognized by the AU, only one hasn’t decided to be a part of the organization’s enterprise to open up intra-African trade in goods and services. The only country to deny the initiative is Eritrea, which has a mostly closed economy. More than half of the participants approved the deal.

Why Establish a Free Trade Agreement?

The agreement has the potential to create a more open market for services, since it decreases or eradicates cross-border costs on 90% of goods. It also enables the movement of capital and people, inspires investment, and encourages customs union over the whole continent.

However, some countries will have to change their domestic regulations to comply with the implemented rules once the members have decided on how to handle cross-border payments, telecommunications, transport, and professional services.

When Will Trading Begin Under the Agreement?

Although the trade area came into force in May 2019, after four years of negotiation when the necessary minimum of twenty-two nations sanctioned it, the first commercial deal was to take place on July 1, 2020. However, the pandemic deferred negotiations on rules of origin, which establishes the nationality of goods and tariff concessions.

There are still discussions to be had on competition policy, intellectual property entitlements, and investment procedures. Thus, the AU has decided to change the remaining talks to the online platform, and they hope for trading under the agreement to start in January 2021 and shift to complete operation in 2030. However, there is no doubt that coming to a satisfactory conclusion for the unresolved issues with such a big and diverse group will not be easy.

What Are the Possible Advantages of the Free Trade Agreement?

Should the free trade agreement be complemented by meaningful policy reform and procedures to enable trade, the World Bank estimates that the agreement could strengthen Africa’s income by $450 billion and has the potential to raise 30 million people out of severe poverty by 2035.

In the short term, though, decreased trade costs could help the African continent alleviate output losses ranging from $37 billion to $79 billion as a result of the pandemic. Côte d'Ivoire (Ivory Coast) and Zimbabwe will likely profit the most from the agreement as their trade costs are some of the highest in the region. Here, there is expected to be an income increase of 14%.

Countries such as South Africa and Kenya — who have bigger manufacturing bases and superior road networks, railways, and ports — will probably benefit more from increased regional integration. However, some countries won’t see as many advantages as others due to poor infrastructure and non-tariff blockades, including burdensome government regulation.

The AU has stated that Africa’s industrial exports are expected to see the African Continental Free Trade Area’s advantages most prominently. This is significant as it varies Africa’s trade and boosts pulling back from extractive commodities, including oils and minerals, which are known to be unstable.

According to the AU, over 75% of Africa’s exports beyond the continent between 2012 and 2014 were extractives. As they are so volatile, it is disadvantageous to many African countries to have such economic and fiscal reliance on their export.

Instead, the AU aims to push a more stable and sustainable export base. This model will also focus on providing employment opportunities for the growing number of youths in the continent by fostering labor-intensive trade. Many people are needed, which will create significantly more jobs. These trades are primarily in the manufacturing and agricultural industries, and the African Continental Free Trade Area will benefit them the most.

Potential Disadvantages and Complications

Tariffs are a significant income source for numerous governments; they are regularly used to safeguard domestic industries, and letting go of them will necessitate certain changes. As two of the biggest economies, South Africa and Nigeria may be required to remove 90% of their tariff groups over a five-year timeframe. Ethiopia, Sudan, and Zimbabwe may have to do the same over a duration of 15 years. Still, as time has told us, the execution of this will not be a quick process.

A prime example of this is the Tripartite Free Trade Area, which was the predecessor of the African Continental Free Trade Area and intended to merge the Common Market for Eastern and Southern Africa, the East African Community, and the Southern African Development Community. This has been an ongoing negotiation for around a decade, and it still hasn’t been fully implemented.

The Current State of Intra-African Trade

The African Export-Import Bank disclosed that shipments are responsible for approximately 15% of the African continent’s whole trade. It is estimated that the African Continental Free Trade Area could double that percentage within a decade. Thus far, the movement of goods has been hindered by non-trade difficulties, including poor infrastructure, interruptions at border posts, and poorly trained or even corrupt customs officials.

More than the actual agreement, overcoming these difficulties could prove more beneficial to improving trade across the continent.

About the Author

Headshot of author Luigi Wewege

Luigi Wewege is the Senior Vice President, and Head of Private Banking at Caye International Bank. Outside of the bank, he serves as an Instructor at the FinTech School which provides online training courses on the latest technological and innovation developments within the financial services industry. Luigi is also the published author of: The Digital Banking Revolution.

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