The AFCFTA: Getting to the Basics
Background
The AfCFTA, short for “African Continental Free Trade Area” is a trade agreement between African Union (AU) member states aiming at creating a single continental market for goods and services as well as a customs union with free movement of capital and persons. The agreement was signed in Kigali in March 2018 by 44 member states and entered into force on 30 May 2019. African Leaders reached an agreement after four years of negotiation on this agreement in March 2018. The AfCFTA bloc consists of 54 of the 55 African countries excluding Eritrea. It is regarded as the largest trade bloc since the creation of the WTO in 1994. The deal creates a single market, reducing tariffs (on up to 90% of goods) and ensuring fair trade in Africa while permitting producers to benefit from cheaper raw materials and consumers to get cheaper imported products. It is estimated that the agreement will boost intra-Africa trade by 60%.
The AfCFTA aims to unite 1.3 billion people and a $3.4 trillion economic bloc with a combined GDP of US$2.5 trillion. The supporting instruments to the agreement are rules of origin, schedules of tariff on trade in goods, online non-tariff barriers monitoring and elimination mechanism, digital payments & settlement platform and African Trade Observatory Portal. According to the U.N. Economic Commission on Africa, intra-African trade is likely to increase by 52.3 percent under the AfCFTA and will double upon the further removal of non-tariff barriers.
While trade supports growth, it may also entail costs, and its benefits may not be evenly distributed across and within countries.
Prospects of the AfCFTA
The prospects of the AfCFTA are numerous. It allows Nigerian companies to enter new markets, expands their customer base and leads to new products and services by making investing in innovation viable. A successful continental free trade area could re-invigorate the Nigerian manufacturing sector and a bigger manufacturing sector will lead SMEs to create more well-paid jobs, especially for young people, thereby alleviating poverty. It will also increase intra-African trade by 52.3 percent which will double upon the further removal of non-tariff barriers.
The Agreement will also draw an influx of foreign direct investment much needed in the maritime sector which will in turn expand local industries and boost domestic businesses. An inflow of foreign capital can also stimulate banking systems, leading to more investment and consumer lending. The AfCFTA will also ease the process of importing raw materials from other African countries. It will also enable SMEs to set up assembly firms in other African countries in order to access cheaper means of production. The AfCFTA will enable multinational companies to partner with local firms to develop raw materials, train them in best practices and transfer technology in the process.
Problems Facing the AfCFTA
A major problem of the AfCFTA is that it has the greatest levels of income disparity of any continental free trade agreement. For example, over 50% of Africa’s cumulative GDP is contributed by Egypt, Nigeria and South Africa, while Africa’s six sovereign island nations collectively contribute just 1%.
The agreement may also be bad news for many emerging African businesses as they will have to compete with large agri-businesses in high-income African countries such as South Africa, Kenya, Ethiopia, Egypt and Nigeria. As a result, they may lose their business, leading to high unemployment, crime and poverty. Also, the level playing field brought by elimination of tariffs may lead to local producers losing huge sales to foreign suppliers, because the latter can lower the cost of their products by leveraging the reduced tariffs imposed on imported goods. This increased competition may lead companies to cut corners to achieve lower production costs which might be bad for sustainable use of resources and the environment. There are no detailed safeguards in the agreement for environmental protection and also protection against intellectual property theft which are all likely events giving the openness of the agreement.
The agreement also brings certain problems with it including the likelihood of dumping, a situation where countries bring in goods in high quantity and at low prices to saturate the market and effectively kill local businesses. Given the reduction of tariffs and the fact that Nigeria represents the largest market in Africa, this is very likely to occur. The agreement brings to the fore the failures of the regional trade blocs in Africa and poses a challenge to its effectiveness. Also, the agreement represents a gift to foreign companies as they can now access the African Market free of tariffs and this is also another challenge to local businesses (especially since China pushed hard for the deal and was heavily involved in negotiations).
It is quite difficult to imagine how the trade agreement benefits Nigeria given the lack of diversification in the economy and the heavy reliance on oil which is its major export. Also, the biggest buyers of Nigerian exports are outside the shores of Africa (the US and China). There is also the fear that the agreement will pave the way for terrorism financing and facilitate the importing of banned substance such as cocaine. The elimination of tariffs and non-tariff barriers makes it easier for terrorist groups to receive assistance from other African states. Also, the Nigerian ports lack the adequate infrastructure to administer the sheer amount of goods the trade agreement will facilitate. These could mean authorities will most likely miss banned substances being snuggled into the country.
Plan Going Forward for Nigeria
The primary motive for Nigeria signing the AfCFTA was to boost intra-african trade and the economy. However, specific obstacles impede the Agreement’s effective implementation in Nigeria which was why Nigeria refrained from signing the agreement for a long time. Politically, the concern would be how it will affect future agreements with other trade blocs in the world considering that intra-African exports only amount to 18% of total African exports. Also, there were grave concerns as to the effect on intra region trade which is very underdeveloped in Africa unlike other countries. Economically, it is feared that the agreement will undermine local businesses and entrepreneurs who will have to compete with lower prices of imported goods due to the elimination of tariffs. Also, Nigeria has failed to address its internal struggles with congestion at the ports and bad road networks for transportation of goods and may be overwhelmed by the sheer amount of goods entering the country.
Amidst these challenges of implementing the AfCFTA for African countries, it is very important for Nigeria (owning 16% of the total African GDP) to fashion out a comprehensive implementation plan going forward. Implementation plans must focus on these questions:
How has trade in Africa evolved over time and how does it affect from Nigeria’s international trade?
What is the potential impact of the AfCFTA on intra-regional trade (particularly its impact on ECOWAS) and what policies are needed to foster further regional trade integration?
How will the AfCFTA affect welfare, income distribution, and the fiscal revenue of Nigeria?
How can the African Continental Free Trade Area provide business opportunities that will enhance industrialization in Africa in line with Agenda 2063?
Fortunately, the Federal Government has set up a National Action Committee to coordinate the implementation of the AfCFTA. As stated by Prof. Yemi Osinbajo, the Vice-President of Nigeria, “While implementation of the Economic Recovery and Growth Plan is already in progress, an AfCFTA National Action Committee comprising various stakeholders has been established by Mr President to coordinate the implementation of all the AfCFTA readiness interventions”. It is hoped that the committee will come up with a comprehensive implementation plan that safeguards Nigeria’s interests.
Conclusion
Without comprehensive policy-making and preferential treatment for Africa’s most at-risk economies, the AfCFTA could prove to be a force for economic divergence, rather than a force for good. It is therefore important that Nigeria builds an efficient and participatory institutional architecture of policies that addresses the concerns of labour unions, encourages healthy competition without killing local businesses, ensure strict adherence to environmental goals and protect intellectual property.
