2 May 2019

African Continental Free Trade Area: significance and key challenges ahead

by Oni Oviri

The African Continental Free Trade Agreement (AfCFTA) is a trade agreement between 55 African Union member states. Its principal goal is to create a single market for trade in goods and services, with future ambitions to create a single currency union and allow free movement of business persons. The ultimate strategic aim is to turn the agreement in to a Customs Union, creating the largest trade zone in the world.

Signed on 21st March 2018 in Kigali, Rwanda, 22 countries were then required to ratify the agreement for AfCFTA to become effective. After a slow start, it finally reached the landmark 22nd ratification on the 30th April 2019.

The 7th July 2019 has been marked as the date the agreement will enter into force during an Extraordinary Heads of State and Government Summit. Nigeria, however, with the largest population and economy on the continent, has yet to sign, prompting analysts to question whether the AfCFTA will ever fully take off.

Until now, progress in achieving economic integration across Africa has largely failed, apart from the Regional Economic Communities which the African Union recognises as the strategy to lead the deliverance of its’ New Partnership for Africa’s Development (NEPAD).

But acceleration on economic cooperation has stretched over decades. 56 years ago in Addis Ababa, Ethiopia, 32 leaders of African states gathered to form the Organisation of African Unity (OAU). The expressed vision of the OAU was to bring countries together to encourage political and economic integration.

Yet, the OAU lacked influence. Its inability to intervene in major events, such as the wars that engulfed Nigeria and Angola in the 1960s, led to the OAU splitting into two unions. One was the Monrovia Group, who believed in a more incremental approach to a unified continent. They argued that countries must first understand how to govern themselves and manage their economies before integrating more widely. The other union was the Casablanca Group. They believed that Africa needed to be unified, as the only way to develop and integrate economically whilst ensuring peace and stability. For the Casablanca Group, the integrated states of the European Union represented the way forward.

However, the African continent is in no way homogeneous, unlike Europe. After the OAU was eventually replaced in 2002 by the African Union (AU), the quest to achieve economic ties and integration was left to the AfCFTA.

If delivered, the AfCFTA will be a triumph. Millions of Africans will be propelled out of poverty, creating a powerful influence in trade globally for the continent and, more importantly, enabling countries in Africa to trade resources amongst themselves. Analysts forecast that intra-Africa trade will grow by 52% by the year 2022 and remove tariffs on 90% of goods. This increase in intra-African trade combined with geographically diversified trade links would strengthen the capacity of African countries to absorb economic shocks.

Perhaps the most interesting benefit will be that countries in the continent will be able to develop their value chains, adding value by turning raw products into finished goods which can then be traded around the continent, tariff free. The potential benefit is vast: continental value chains would bolster African economies by taking full advantage of economies of scale.

With wages still remaining comparatively low and manufacturing processes developing, driven by increasing global value chains, Africa is tipped to take over from China to become the factory hub of the world. By creating much needed jobs for the combined population of over 1.2 billion people, it is unsurprising that the Financial Times predict that Africa will be the new China.

But Africa is geopolitically complex. Many of the countries are economically weak, with wide variations in levels of development. Regional Economic Communities largely focus on peace and security agreements and freedom of movement through unified passports, than than the convoluted pursuit of greater economic integration.

These wide variances in economic development have raised scepticism over whether the agreement may overly burden individual country resources. For example, of Africa’s $2.25 trillion combined GDP in 2017, Egypt, Nigeria and South Africa accounted for 50%.

This fact has encouraged Nigerian President Buhari’s protectionist instincts towards delaying signing the agreement. Buhari has said that his government needs to undertake a comprehensive due diligence analysis to ensure that AfCFTA will not undermine Nigerian manufacturers and entrepreneurs. The South African President, Cyril Ramaphosa, expressed his surprise, stating:

“The continent is waiting for Nigeria…”

The former President of Nigeria, Olesegun Obasanjo, waded in to express his “regret that Nigeria had yet to ratify the AfCFTA, even though the final negotiations for the agreement were led by Nigeria.”

The Director General of the Nigerian Office for Trade Negotiations, Chiedu Osakwe, asserted in March 2019, that his office has undertaken 300 hours of research, consulting with over 35 key stakeholders across the country. In a press briefing he indicated that the government’s key concern was whether the agreement adequately prevented anti-competitve practices, essentially fearing that SME’s could be squeezed out by foreign suppliers.

This is hardly unjustified. Globalisation of commodities in the continent over the past century has brought in powerful foreign investors who retain a stranglehold on Africa’s supply chain and, with the lure of free trade across borders, foreign investors will be able to make significant inroads on cross-border trade routes into the larger economies on the continent.

President Buhari’s government have not disguised their approach to managing foreign investors. They have imposed protectionist policies including foreign exchange bans on 41 items of import and further import bans on items such as rice, with the belief that imposing trade barriers will aid local manufacturers and stimulate domestic production. The World Bank advised Nigeria against this policy and, by 2018, it was reported that Nigeria’s economic market had declined to the extent that more people were living in extreme poverty than anywhere else in the world.

The AfCFTA would indeed undermine President Buhari’s protectionism: foreign investment is key to ensuring the success of AfCFTA. Many African countries are landlocked and the physical infrastructure is not in place to promote efficient cross border trade, a necessity to boost export efficiency. Foreign investment has largely come from China, which has negotiated trade deals in exchange for building infrastructure, such as railway lines and roads in countries like Nigeria and Tanzania.

Nigeria has, surprisingly, not repelled the advances of China as a foreign investor. Instead in February this year, the government formally joined the One Belt One Road Initiative, signing an Memorandum of Understanding with the promise of significant infrastructure development in Nigeria. 20 other countries in Africa have also signed the agreement, creating the capacity for China to create an integrated connected supply and logistics chain across the continent.

The AfCFTA marks the beginning of a new chapter in the development of Africa. If the member states of the African Union can work together, the trade agreement could play the most significant role in the history of African development since decolonisation, achieving the vision that the OAU set out to achieve in 1963.

If all else fails there is China, whose Premier Li Keqiang in a speech to African leaders, referred to the dream expressed by the former AU Commission Chairperson Dr. Nkosazana Dlamini Zuma, about connecting all 54 African capitals via high speed railways. Premier Li stated that China would help to make that dream come true. It is perhaps, China, therefore, that will be the greatest force to connect Africa’s supply chain and make the AfCFTA a success. We are yet to see the finer details of the agreement but, if it works, Africa will surely become the new Supply Chain frontier.

For more in-depth analysis on trade policy in Africa, see “The Future of UK-East Africa Trade”.

Oni Oviri

Oni Oviri is Managing Director of Sasare Associates, a consultancy advising on best practice Supply Chain and Logistics Management for global private sector and UK public sector organisations.