Trade as an Engine of Growth

The African Continental Free Trade Area (AfCFTA), launched in May 2019, is a major initiative aimed at promoting economic integration and trade among African countries. Indeed, as the world’s largest free trade area, it represents one of the most significant developments in African economic and trade policy. The AfCFTA seeks to create a single continental market for goods and services with the ultimate goal of enhancing economic growth, reducing poverty and promoting sustainable development across the continent. 

Over 40 countries signed the AfCFTA agreement in 2019 and once fully implemented, the free trade area is expected to cover all 55 African countries with a combined GDP of about US$2.2 trillion. There are large potential benefits and costs as well as challenges to its successful implementation. 

Benefits 

In addition to increased trade flows both in existing and new products, AfCFTA has the potential to generate substantial economic benefits for African countries. These benefits include higher income arising from increased efficiency and productivity from improved resource allocation, higher cross-border investment flows and technology transfers. Specific examples include: 

• Elimination of trade barriers: AfCFTA aims to eliminate or significantly reduce trade barriers, including tariffs and non-tariff barriers, among African countries. This is expected to boost intra-African trade by making it easier and more cost-effective for African nations to trade with each other. 
• Single market: The agreement envisions the creation of a single continental market with a population of over 1.3 billion people, providing a substantial consumer base and potential for economic growth. 
• Customs union: AfCFTA is designed to establish a single African customs union which will facilitate the free movement of goods and services across the continent. 
• Economic diversification: The agreement aims to promote economic diversification and reduce dependence on traditional commodity exports by fostering a more diversified and value-added trade structure. 
• Job creation: By stimulating trade and economic activity, AfCFTA seeks to generate job opportunities and contribute to poverty reduction and improved livelihoods for the people of Africa. 
• Industrialization: The agreement encourages industrialization and value addition within the continent by promoting regional and continental value chains. 
• Infrastructure development: To facilitate trade, AfCFTA recognizes the importance of improving transportation, logistics and digital infrastructure across the continent. 
• Legal framework: AfCFTA has a legal framework that covers trade in goods and services, intellectual property, competition policy and other areas. Adopting this framework will help strengthen many member countries’ own legal structures vis-àvis the private sector, property rights, upholding the rule of law and the overall ease of doing business. 

Costs 

Besides lowering import tariffs, which are important fiscal revenue sources for many partner countries, there are certain steps that need to be taken to ensure the above-listed benefits. African countries will need to reduce other trade barriers by making their customs procedures more efficient, cut their wide infrastructure gaps and improve their business climates. These are no easy feats to achieve given capacity constraints in many partner countries and a lack of financial resources with which to boost infrastructure. 

• Tariff Revenue Loss: The immediate reduction in trade related fiscal revenues arising from implementing AfCFTA will be at the forefront of all ministries of finance strategic planning for the years ahead. Reduced or eliminated tariffs will lead to a loss of government revenue, which could affect fiscal sustainability and public service provision. The average import tariff for sub-Saharan Africa was nearly 11 percent in 2021, according to the World Bank3. Obviously, with an increase in overall trade resulting from the impact of AfCFTA, a net improvement in trade revenues (export and import tariffs) is expected over the coming years as many barriers are dismantled and commerce is freed from bureaucracy. However, the immediate impact will likely be a reduction in import tariff revenue, which will add pressure to fiscal budgets that are already strained from several years of above-trend spending due to COVID-19-related support and more recently the need to increase price subsidies caused by the spike in global food and fuel prices driven by the war in Ukraine.
• Competition and Adjustment: Some domestic industries may struggle to compete with foreign products, potentially leading to job losses and the need for transitional policies to support affected workers with associated fiscal costs.

Challenges 

At the same time, policy measures will need to be taken to mitigate the differential impact of trade liberalization on certain groups as resources are reallocated in the economy and activities migrate to locations with comparatively lower costs. 

While the AfCFTA agreement has the potential to bring significant benefits, it also faces challenges, including the need for effective implementation, addressing regulatory and logistical barriers and promoting cooperation among member countries. 

• Implementation challenges: The success of AfCFTA depends on effective implementation, which can be challenging given variations in regulatory environments, infrastructure deficits and bureaucratic hurdles in different African countries. 
• Infrastructure gaps: Inadequate transportation and logistics infrastructure can hinder the smooth movement of goods and services, offsetting some of the benefits of increased trade. 
• Non-tariff barriers: While tariffs are a visible trade barrier, non-tariff barriers, such as regulatory differences and customs delays, can continue to impede trade. 
• Weaker economies: Smaller and less-developed economies may face challenges in adapting to increased competition and there is a risk that the benefits of AfCFTA may be unevenly distributed across the continent. 
• Political and security issues: Political instability and security concerns in certain regions can disrupt trade and economic activities. 

The Way Forward... 

The ultimate impact of AfCFTA will depend on how effectively these challenges are addressed and how the member countries cooperate to maximize the benefits of the agreement. Properly managed, AfCFTA can help African countries harness their economic potential, boost trade, and reduce poverty. However, addressing challenges and ensuring that the benefits are widespread and sustainable will require concerted efforts by African governments, international organizations and the private sector in order to maximize the positive impact that can be realized. 

Citation: World Bank’s Global Preferential Trade Agreements (GPTAD) database, which is integrated with the World Bank’s World Integrated Trade Solution (WITS) database https://wits.worldbank.org/CountryProfile/en/Country/SSF/Year/LTST/Summary