At a time when trade is facing incredible headwinds and questions are being raised about the utility of regional integration processes, the Establishment of the African Continental Free Trade Area (AfCFTA), is a welcome positive spot. By seeking to deepen economic integration of the African continent by creating a single continental market with free movement of business, people and investments, the AfCFTA is a evidence to the power of cooperation and a shared vision.
African leaders from 44 African nations gathered at the African Union Summit from March 17th to 21st 2018 in Kigali, Rwanda, and signed the Continental Free Trade Area (AfCFTA) treaty to create the world’s largest single market. The agreement will be the largest trade agreement in history since the creation of the World Trade Organization.
The treaty aims to boost intra-African trade by making Africa a single market of 1.2 billion people and a cumulative GDP over $3.4 trillion. The UN Economic Commission for Africa (UNECA) estimates that the implementation of the agreement could increase intra-African trade by 52% by 2022 and double the share of intra-African trade (currently around 13% of Africa’s exports) by the start of the next decade.
Increasing intra-African trade, good news for Africa due to the nature of the goods typically traded within the continent. Many African economies rely heavily on exporting raw materials, and for three-quarters of African nations, commodities account for at least 70 percent of their exports. This hurts many African economies because raw materials are especially prone to frequent price fluctuations, so reliance on commodities risks economic volatility and unstable business environments. But there’s good news. Increasing the trade of higher value manufacturing goods through the AfCFTA will help African nations diversify their exports and build more resilience to price fluctuations. A more stable economy will attract investors and allow for the growth of more small and medium enterprises—since smaller businesses with less cash flow are the most vulnerable in a fluctuating economy. More manufacturing will help Africa’s economy prosper because the fastest-growing regions in the world are the ones that diversify their economies the most.
One of the key freedoms that integration agreements seek to establish is the ability of people to move freely between the countries that are parties to the integration. United Nations Economic Commission of Africa (UNECA) notes that ‘the free movement of people across borders has been high on the regional integration agenda, primarily because of the prospective trade gains that are associated with it. Free movement of people across Africa represents a powerful boost to economic growth and skills development when people can travel with ease for business, tourism or education. Everyone benefits from a country that opens up their borders as well as the country whose nation is on the move, as seen in the growth in remittances in recent years’.
The African business community is a key beneficiary of the agreement. Potential advantages to the private sector include increasing economies of scale and access to cheaper raw materials and intermediate inputs; better conditions for regional value chains and integration into global value chains; catalyzing the transformation of African economies towards greater utilization of technology and knowledge; facilitating both intra-African and external direct capital flows to African countries, and creating a labour market and a demand pull throughout the continent. To ensure that the private sector can benefit from the African Free Trade Area, it is important that business understands what the AfCFTA and future negotiations will cover. Business should ensure its voice is heard as governments craft and operationalize the agreement. In order to do that, they need to be fully aware of the issues, potential benefits and opportunities and, most importantly, the role they can play.
This knowledge will enable business to engage effectively in advocacy and public-private dialogue mechanisms to support the negotiations and subsequent implementation of AfCFTA.