What is the African continental free trade?
In this article, I will share with you the benefits small and medium-sized enterprises (SMEs) and investors will enjoy under the African Continental Free Trade Area (AfCFTA). I will also share with you how the AfCFTA will disadvantage SMEs.
Leaders from 54 African nations celebrated an economic milestone on July 7, 2019 when Nigeria joined other 53 African Union (AU) member states to implement the African continental free trade area, one of the world’s largest single markets worth US$4 trillion in spending and investment. Twenty-seven member states officially signed the agreement in Kigali, Rwanda on March 21, 2019. The main purpose of the signatures is to ensure that countries play their part in making the AfCFTA project a success – to bring order in the process. The long-term objective of the AfCFTA project is for Africa to have its own pan-African institutions such as the African Economic Community, African Monetary Union and an African Customs Union, among others. The free-trade zone will be in full operation from mid-2020.
The African Union’s Agenda 2063 has a framework for structural transformation and development which seeks to remove restrictions on trading across countries and borders in Africa. The framework also provides a provision for a single air transport market with the aim of ensuring there is little to no limits on free movement of people and free trade across the continent. AfCFTA is built on this purview. According to the United Nations Conference on Trade and Development (UNCTAD), if implemented well, the AfCFTA could boost Africa’s production and increase availability of affordable goods. This could raise about US$3.6 billion in welfare gains. By 2030, the free trade area could also bring in combined consumer and business spending of US$6.7 trillion.
Would regional economic communities dissolve?
The African Continental Free Trade Area will consolidate the overlapping memberships and efforts of the Regional Economic Communities (RECs). Instead of achieving individual and regional community goals, the RECs will help achieve the AfCFTA goals. This will make things simpler when it comes to cross border trade laws. RECs will not dissolve, at least not for now.
The journey so far
In January 2012, heads of state and government of the African Union met in Addis Ababa, Ethiopia for the 18th Ordinary Session of the Assembly to discuss the future of the continent. During this session, a historic decision was taken to establish a continental free trade agreement between member states by 2017. The African leaders also endorsed the Action Plan for Boosting Intra-Africa Trade (BIAT) to deepen Africa’s market integration. The seven focus areas of BIAT include trade policy, trade facilitation, productive capacity, trade related infrastructure, trade finance, trade information and factor market integration.
After six years since the free trade idea was birthed, African heads of state and government of the AU finally launched the operational phase of AfCFTA in Niamey, Niger on July 7, 2019. To date, 54 countries have signed the AfCFTA Agreement –Only Eritrea is yet to sign.
The AU has picked out Ghana to host the AfCFTA secretariat to facilitate the implementation of the free trade agreement.
AfCFTA in a nutshell
Following the discussion so far, one can comfortably say the aim of AfCFTA is to create a single continental market for goods and services to allow for the free movement of businesspeople and investors. It’s a great achievement for Africa.
The four main objectives of AfCFTA
- Create a single continental market for goods and services, with free movement of businesspersons and investments, and thus pave the way for accelerating the establishment of the continental customs union and the African customs union.
- Expand intra-African trade through better harmonization and coordination of trade liberalization and facilitation regimes and instruments across RECs and across Africa in general.
- Resolve the challenges of multiple and overlapping memberships and expedite the regional and continental integration processes.
- Enhance competitiveness at the industry and enterprise level through exploiting opportunities for scale production, continental market access and better reallocation of resources.
The bolts and nuts that will bring the African free trade together nicely
The magnitude of the free trade project can be overwhelming. Perhaps some of the critical questions we should be asking concerning its successful implementation are whether some African countries have the infrastructure to implement AfCFTA? Do these countries have the requisite implementation strategy and capacity? To make the journey a success, some measures have been put in place to streamline the free trade implementation and further improve the connectivity and efficiency of trade among African countries. These measures include cooperation on rules of origin, the monitoring and elimination of non-tariff barriers, a digital payment system, and a trade observatory dashboard.
What do the rules of origin mean?
The ‘origin’ is where a product is produced. The ‘rules of origin’ are meant to prevent abuse of tariff removal on products. If this is not done, one can import products from outside the African continent into an African country, A, and ship them to another African country, B, to take advantage of preferential tariffs or rates of duty. Auto parts manufactured in a non-African country and assembled in an African country, is another example. The details of the implementation are yet to be clarified under the AfCFTA rules of origin. Familiarising yourself with these rules of origin is key to enjoying the full benefits of the free trade area and its preferential trade tariffs.
The ‘not so good’ aspects of AfCFTA for SMEs
The African continental free trade area agreement has what it takes to revolutionise Africa’s economic growth. Though the benefits may not be experienced equally across countries, big economies and smaller ones will enjoy different benefits which are relevant to their respective economic growth. For instance, whilst big industrial economies enjoy preferential tariffs on raw materials from smaller countries, the latter would also benefit from preferential tariffs when adding value to their products in factories in the industrial countries. Amid the opportunities, local businesses would face some challenges such as increased competition. Small and medium-sized enterprises will be at the receiving end of the brunt. Below are some of the not-so-good AfCFTA news for SMEs.
- Small businesses with weak products may be knocked out of business. You must have a winning product to rise above competition. This winning product must be an innovative product which is in-touch with reality, one which solves real-life problems. With the fierce competition, a product that is not value for money will soon be out of the market.
- Consultants with low skillset may face stiff competition during contract and job search. If your skills are not comprehensive and highly sought-after, you may find it difficult to meet recruiters’ requirement. Labour unions must work with companies and governments to find a lasting solution to the labour challenges that AfCFTA may pose.
- Cheaper product competition may kill local SMEs. Incoming cheaper products may push small businesses out of the market. The onus is on SMEs to find cheaper production factories to bring down the unit price per product.
- Customers may be at risk of getting a bad deal. Due to influx of cheaper products and drop in prices, some businesses may resort to cutting corners to produce cheaper versions of goods. End-users may suffer if quality is compromised.
The AfCFTA good news for SMEs
The United Nations estimates intra-African trade to increase by 52.3 per cent, by 2020. The intra-African trade will be boosted by the immediate removal of all tariffs on 90 per cent of goods, whilst the remaining 10 per cent of tariffs will be on products classified as ‘sensitive goods’, which will be phased out at a later stage.
As we wait for the finer details on the ‘rules of origin’ and which products and services originating from Africa will be tariff-free, the following are the benefits that SMEs will enjoy under AfCFTA.
- The import and export tariff burdens on SMEs will be drastically reduced as people trade between African countries in the free trade zones.
- As trade increases under AfCFTA, SMEs will have the opportunity to diversify their exports to safe-guard price fluctuations. The entrepreneurs who win in the AfCFTA market would be the ones who add value to the manufacturing supply chain.
- SMEs in Africa will enjoy a booming market that offers options for trade and partnership. With fifty-five countries and about 1.7 billion people by 2030, diverse markets and customers are endless. Increased markets and customers will also result to increased demand for manufacturing products.
- Transport, communication, tourism and service sectors are hotcakes. With the imminent implementation of the African passport and the African digital payment system, the mass movement of people across the continent will boost the transport and logistics, communication, property and service sectors. SMEs who will develop solutions in the value-chain will transform lives and make some good money in the process.
- African markets data for business and investment decisions will be readily available. The establishment of an African Trade Observatory by 2020 to be the repository for trade and trade-related data means SMEs and investors will be able to access valuable market information for business decisions when they need it.
- There will be an increase in women entrepreneurs who will trade across borders. According to the United Nations Development Fund for Women (UNIFEM), women in the Southern African Development Community (SADC) constitute up to 70 per cent of informal cross-border trading and this is set to increase with AfCFTA.
- As inflow of investments to Africa and across countries increase, opportunity to scaleup business will be every entrepreneur’s dream come true.
- The opening of borders and corresponding intra-trade will present entrepreneurs with unlimited access to raw materials for production. These open borders also mean faster movement of goods and services, and timely supply of products to clients.
- For jobseekers, because there will be many incoming companies with the ability to move across the continent, there will be options for securing well-paying jobs.
- When goods and services are cheaper, your employees may not bother you so much with pay increase. I thought you should know 😊
The African continental free trade area is here to stay and has a lot to offer businesspeople and investors in the continent. Going forward, African countries should strive to increase local processing of primary commodities in order to fully benefit from the continental tariff-free trade, especially under the rules of origin. For example, Ghana and Côte d’Ivoire should find ways to process their raw cocoa beans at home into finished products such as chocolate, moisturising cream and soap, instead of exporting the raw bean abroad. Strong political will is needed to implement policies and instruments that will drive the nitty gritties of AfCFTA. These policies must include increased access to social services such as healthcare, affordable housing, community management, to name a few.
African governments must start educating their citizens about increased competition in the labour market due to open borders. This will help reduce the occurrence of xenophobia and other economic backlash. As problems with transport, border post and red tape are dealt with, African governments must also root out corruption in the system to unblock the tunnel of prosperity for all. It is a new dawn for Africa and for SMEs in the continent. The excuse of border related bottlenecks and high tariffs is being removed. What are you waiting for? Start that business, scale up to other African markets. Africans are waiting for your goods and services.
NB: If you need advice in getting your business going in Africa, get in touch.
- AU – https://au.int/en/ti/cfta/about
- UN – https://www.un.org/africarenewal/magazine/august-november-2018/africa-set-massive-free-trade-area
- UNCTAD – https://unctad.org/en/PublicationsLibrary/ditc2018d3_en.pdf
- Quartz Africa – https://qz.com/africa/1633022/africa-free-trade-deal-will-boost-continent-economy/
- Infomineo – https://infomineo.com/africa-continental-free-trade-area/
- Reuters – https://www.reuters.com/article/us-africa-trade/nigeria-keen-to-ensure-africa-trade-bloc-good-for-itself-president-idUSKBN1GX29V