Originally agreed in 2018 and committed to by all 54 African countries, the African Continental Free Trade Area (AfCFTA) came into effect in January 2021 after being delayed by the COVID-19 pandemic. Some are hailing it as a game-changer for African regional and international trade, one that will “enhance competitiveness and stimulate investment, innovation and economic growth by increasing efficiency and eliminating barriers to trade,” according to a Foreign Policy article published at the end of 2020. So far 36 countries have ratified the agreement, including big economic players such as Nigeria and South Africa – an encouraging sign, as Amadou Diallo, CEO, DHL Global Forwarding Middle East & Africa, notes.
“It’s a new baby, it needs to grow, learn to walk and talk,” says Diallo. “The intention is great, but it’s completely in its infancy. Its success totally depends on the implementation of its measures.”
If all goes to plan over subsequent months and years, the agreement will eventually cover a market of more than 1.2 billion people and up to $3 trillion in combined GDP, according to the U.N. Economic Commission for Africa. It notes the agreement could increase intra-African trade – which lags far behind the internal trade of other continents – by over 50%. Only 14.4% of official African exports went to other African countries in 2019, a small proportion compared with the 52% of intra-Asian trade and 73% between European nations that year, according to Afreximbank, a Cairo-based, multilateral trade finance institution.
“Between 2012 and 2014, more than 75% of the continent’s exports were extractives,” says Hennie Heymans, CEO, DHL Express Sub-Saharan Africa. “Yet less than 40% of intra-African trade was extractives during the same period, according to the African Union (AU), further underscoring the need to boost trade within the continent.”
Is the creation of the largest free trade area since the establishment of the World Trade Organization the answer to Africa’s economic challenges? Or, as its critics suggest, is AfCFTA a white elephant that distracts from first tackling more pertinent logistical and trade challenges? The answer appears to lean toward the more hopeful side – though achieving success will undoubtedly take time, with much to overcome.
The AfCFTA represents a major opportunity for countries to “boost growth, reduce poverty and broaden economic inclusion,” says a World Bank report. It estimates the trade pact could lift 30 million Africans out of extreme poverty by 2035 and, by reshaping the continent’s markets and economies, create new industries and expand key sectors, boosting regional income by 7% to the tune of $450 billion. Most of AfCFTA’s income gains – $292 billion – would come from measures cutting red tape and simplifying customs procedures, lowering compliance costs for businesses engaged in trade, and making it easier for African businesses to integrate into global supply chains. The remainder – about $153 billion – would come from income boosted by tariff liberalization and the reduction of non-tariff barriers such as quotas and rules of origin.
Stitching a continent together
In the longer term, AfCFTA can provide a much-needed path to better continental integration by replacing the current patchwork of regional agreements that result in some very lopsided arrangements.
“The key to this sits in the execution and will be dependent on how quickly these reforms are executed at ground level, i.e., at the borders,” explains Heymans. “It will hinge on how quickly custom regulations will be adapted and their officials trained, how quickly and effectively borders will be automated and corruption eradicated, and how quickly and effectively the different trade blocs will adopt this new trade agreement.”
“Currently it’s easier to travel to Kenya from Paris or from China than it is from Senegal,” says Diallo, who comes from Senegal. “Visa applications are very difficult across Africa; many countries don’t have representation in others. Hence, it’s easier for Germans or Brits to travel to East Africa.”
The number of Africans the AfCFTA will help to lift out of extreme poverty by 2035
The amount that the AfCFTA’s payoffs could add to global income
In addition to forging a truly connected continent by enabling goods, capital and information to flow freely and easily across borders, the treaty would, through its economic gains, help countries augment their resilience to future economic shocks. Opening the continent would increase employment opportunities and better incomes, helping to lift around 68 million people out of moderate poverty and making African countries more competitive, Albert Zeufack, the World Bank’s Chief Economist for Africa, has commented.
Heymans concurs. “There is also an enormous opportunity for services under this agreement. In addition, the free movement of labor will be critical as this will strongly complement the objective of the free trade agreement.”
Countries that enact legislation to streamline border procedures and trade flow would be more likely to attract foreign investment. Diallo highlights how DHL Global has already benefited from customs becoming automated in countries like South Africa, Ghana, Cote d’Ivoire and Senegal.
This would also spur local competition, which in turn increases productivity and innovation by domestic firms. “The creation of local champions on the continent will inspire competition,” Diallo says. “It would also generate better discussions locally than when foreign companies come and advise on how to do something. People have more aspiration if they see their neighbor doing it.”
Playing the long game
Yet the challenges are vast. Even AfCFTA’s Secretary General Wamkele Mene cautions that “it’s going to take us a very long time.” He notes that some countries that have ratified the agreement lack the customs procedures and infrastructure to facilitate tariff-free trade. Other critics more bluntly say that there are African countries decades away from being able to comply.
“Everyone struggles to put vision into practice, that’s the case all over the world,” Diallo says. “There are too many negative and distracting conversations. People talk about small African countries being particularly challenged. Mauritius is a small country, but it aspires to be the next Singapore. In Europe you have Switzerland, which is influential. What’s more important is the people living in a country and what they do.”
Nevertheless, intra-African trade remains monopolized “by a handful of countries selling a handful of products,” Foreign Policy reports. While this situation is improving, simply increasing intra-African trade would not resolve the root issue. Diversification of trade while enhancing the value chain is needed for Africa to benefit fully from the free trade agreement. This requires the amendment of current trade agreements that favor raw materials such as agriculture and mineral products being exported – approximately 70% of value addition occurs outside the continent – to the detriment of processed product exports. Scaling the value chain, however, depends on more capacity for processing and packaging. But the power needed to conduct those operations is often inadequate, expensive and unreliable.
Such hurdles could be mitigated by neighbor countries providing what another country lacks until it develops the necessary resources, Diallo notes. Foreign investment and assistance remain key, too. A 2020 report from the management firm Palladium notes that the “mobilization of global private capital” can “drive mutually beneficial economic growth that addresses key priorities including job creation, infrastructure development and improved social services.”
Trade experts say an African single market can offer investors economies of scale, potentially enabling them to manufacture goods in one country and export them tariff-free to the whole continent. Jeffrey Peprah, CEO, Volkswagen Ghana, has said he hopes eventually to export cars assembled in Accra to other West African countries. The World Trade report notes that the AfCFTA’s payoffs could add $76 billion to global income.
It’s been noted how the U.S. under the new Biden administration already has a suite of tools and institutions that can help drive investment toward the AfCFTA. At the policy level, this includes the likes of Power Africa, a U.S. Agency for International Development initiative, which could help address the energy supply challenge by creating more than 30,000 megawatts of cleaner, more efficient electricity generation capacity and 60 million new home and business connections through private-public partnerships.
DHL is also actively committed and involved across key markets in Africa – for example, with the deployment of its GoTrade initiative, which seeks to help developing countries and their SMEs to access the global market, in cooperation with the German governmental agency Gesellschaft für Internationale Zusammenarbeit (GIZ). “Two key projects include our Pan-African e-Commerce Initiative (PeCI) in Kenya, Rwanda, Ghana and Tanzania; and the pre-arrival and pre-department processing program in Kenya, Ghana, Rwanda, Cote d’Ivoire and Tanzania,” says Heymans.
Making it happen during a pandemic
The goals of the AfCFTA have an added urgency given the economic ramifications of COVID-19. Due to the pandemic, AfCFTA is also unrolling in a world that is markedly different from the one in which it was created. The pandemic caused major disruptions in trade across Africa during 2020, resulting in an estimated $79 billion in output losses. The continent faces “an unprecedented health and economic crisis that threatens to throw the region off its stride, reversing the development progress of recent years and slow the region’s growth prospects in the years to come,” states the International Monetary Fund in its report on sub-Saharan Africa, “COVID-19: An Unprecedented Threat to Development.”
But Diallo points out that, given Africa’s size, the continent’s percentage of the global number of infections (about 3.5%) and deaths (roughly 4%) from COVID-19 is surprisingly small. And while the pandemic’s impact on western countries is forcing them to focus on domestic markets, potentially reducing Africa-bound trade and investment, this is compelling African countries to reduce their dependence on foreign exports.
The amount of the combined GDP that the AfCFTA will cover
“This will be good for African countries’ trade balances and will generate more intra-trade on the continent out of necessity,” says Diallo, who notes how, in Senegal, the government is striving for agricultural self-sufficiency rather than depending on Asian rice imports. He also highlights how African countries are having to think about “making their healthcare systems more resilient” due to reduced foreign supplies and assistance.
But can so many politicians across so many African countries coordinate putting the grand vision into practice? The continent’s predominantly youthful population – one of the reasons for Africa’s relative resilience to COVID-19’s fallout – could feature heavily in spurring politicians to implement measures needed for the trade agreement to work, Diallo notes.
“Younger people are using modern technology, are more educated, open minded and have a much better idea of what is going on in the world,” Diallo says. “They will not accept living in the same old ways. This makes the trade agreement not just an aspiration but an obligation for politicians if they don’t want to be pushed.” — James Jeffrey
Published: June 2021
Images: Getty Images; Ungureanu Catalina Oana/Shutterstock; Kay Nietfeld/dpa; Friedrich Stark/imago