The African Continental Free Trade Area: examining its aims and benefits

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The new African Continental Free Trade Area is set to be the largest free trade area since the formation of the WTO, delivering significant benefits across the continent.

Following years of discussions, a final deal has been reached to bring the long-gestating African Continental Free Trade Area (AfCFTA) into reality.

A total of 44 African heads of state and government officials met in Kigali, Rwanda to sign the framework agreement for the AfCFTA on March 21st 2018, putting the impetus on the national governments of each African country to ratify a deal that would lead to the creation of the largest free trade area since the formation of the World Trade Organization (WTO).

With steady progress being made towards this goal, businesses worldwide should be making serious efforts to familiarize themselves with the background and key elements of the agreement, as this will put them in a better position to capitalize on the new commercial opportunities it will present.

Why has the AfCFTA been formed?

The AfCFTA has been established to reflect Africa's status as one of the world's most dynamic growth markets. The 55 member states of the African Union, all of whom will be able to participate in the AfCFTA, have a combined population of 1.2 billion people and a GDP of $2.5 trillion (€2.13 trillion). The region's economy is set to grow at twice the pace of the developed world over the coming years, as the population continues to expand.

However, African trade growth has been constrained up until now due to an average tariff rate of 6.1 per cent, meaning businesses currently face higher duties when they export within Africa than when they sell their wares outside it. As such, the AfCFTA will progressively eliminate tariffs on intra-African trade, while also tackling non-tariff barriers such as burdensome customs procedures and excessive paperwork.

Moreover, the AfCFTA will go beyond traditional trade agreements to also include liberalization of trade in services, an area that comprises around 60 per cent of Africa's GDP. By also standardizing technical and sanitary rules, transit facilitation and customs cooperation, the ease of doing business across borders in Africa will be greatly increased.

What are the key benefits of the deal?

The AfCFTA is expected to make it much easier for African businesses to trade within the continent and meet the needs of the growing market, with estimates from the Economic Commission for Africa suggesting that intra-African trade will rise by 53.2 per cent through the elimination of import duties, or double this amount if non-tariff barriers are also reduced.

Industrial exports are expected to benefit most, which will help the region to diversify its trade output away from extractive commodity markets such as oil and minerals, which are both volatile and finite. The shift will also create more jobs, and generate more opportunities for small and medium-sized enterprises to succeed on the global stage.

To ensure that every African nation is able to benefit from the new free trade pact, efforts will be made to support less developed nations to invest in education and modernize their infrastructure to better take advantage of the emerging opportunities. All in all, it is expected that the AfCFTA will help to reduce Africa's reliance on external resources, and allow the continent to finance its own future development.

What happens next?

For the AfCFTA to enter into force, it must first be ratified by the regional governments of at least 22 countries. Nations such as Ghana, Kenya and Rwanda were among the first to finalize this process, with many other national leaders expressing an intention to do so promptly.

However, the project does not yet have the full buy-in of all 55 African Union nations. Notably, regional economic powerhouses South Africa and Nigeria did not sign the initial AfCFTA agreement, as they are still in the process of assessing its economic and legislative implications. Although both are likely to get involved at some point, an exact timescale has not been given.

Phase two of the negotiation process will be commencing later this year, during which the AfCFTA's provisions for investment, competition and intellectual property rights will be discussed. It will be hoped that future talks can be completed smoothly, allowing the continent's ambition of pan-African free trade to be realized.