Possible gains from Africa’s free trade area

Thursday November 7 2019



Wambugu Wa Gichohi

Wambugu Wa Gichohi 

The Africa Continental Free Trade Agreement (AfCFTA) is a flagship project within Agenda 2063 of the African Union AU- a 50-year master plan to transform Africa into the “powerhouse of the future”. But why is AfCFTA good for Africa?

Currently, Africa trades least amongst itself. Intra- African trade accounts for only about 18 per cent, compared to intra-regional trade in other regions of the world- 68.5 per cent of EU’s total trade; 50.2 per cent in North America and 52.3 per cent in Asia, as at 2015. AfCFTA targets to increase this to at least 25 per cent by 2040- you will increasingly find more goods produced in Africa on sale in your country than those imported from elsewhere.

Production structures in Africa are weak, fragmented and undiversified; economies are small and poor. For some countries, “Aid” accounts for as much as 40 per cent of GDP. With an AfCFTA, small countries will no longer be considered so by investors who would now look at the whole of Africa as one market.

Innovative small economies know not to rely on their size in square kilometres but rather on the size of their innovation. It is no wonder that Rwanda is busy opening factories (e.g. the recently launched cell phone factory), ready to export to the rest of Africa.

Infrastructure deficits, in particular lack of trade facilitation infrastructure significantly add to the costs of doing business; and render production and trade uncompetitive.

Sample this; sixteen African countries are landlocked, trade facilitation bottlenecks account for 14 per cent of trade costs in Africa’s landlocked countries, compared to a developing country average of 8.6 per cent.

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African farmers typically receive only 20 per cent to 25 per cent of the final market price of their goods, compared with the 70 per cent to 85 per cent Asian farmers receive.

Most of the difference comes from transport costs. Further analysis shows that a 5 per cent reduction of time spent at borders could trigger a significant 10 per cent increase in intra-regional trade.

To address these, TradeMark East Africa leads in easing intra-EAC trade through establishing one-stop border posts across many borders of the EAC states.

This also includes landlocked countries- e.g. the recently-inaugurated one-stop Tunduma/Nakonde border post between Tanzania and Zambia. Further, hard infrastructure development ranks high on the African Union agenda with the appointment of Kenya’s Hon.

Raila Odinga as High Representative for Infrastructure Development mandated to mobilize further political support from Member States and Regional Economic Communities-RECs and to facilitate greater ownership by all concerned stakeholders.

These initiatives will eventually remove the current tag of Africa as the least integrated into the global economy.

The AfDB has developed four scenarios that could cumulatively lead to a total gain of USD 134 Billion through AfCFTA. First, the removal of tariffs on intra-African trade with adopted Rules of Origin is estimated to result in a 0.1 per cent increase in net real income for the continent and a gain of USD 2.8 Billion.

Second, and building on the first, extending the free trade agreement to removing the ad valorem tariff (levied as a fixed per centage of the value of the commodity imported) equivalents of nontariff barriers on goods and services on an most favoured nation -MFN-basis would increase the total real income gains 13-fold, for a 1.25 per cent increase in net real income, or $37 billion.

Third, building on the above, adding implementation of the trade facilitation agreements-TFA, also on an MFN basis would lead to an estimated aggregate real income gain of 3.5 per cent, or some $100 billion. Finally, adding an increase in market access in other developing countries to the domestic reform agenda would increase the gains from implementing the TFA to 4.5 per cent of the continent’s GDP, or an additional $31 billion, bringing the total gain to $134 billion.

According to the Brookings Institute-2019, AfCFTA is projected to increase intra-African exports and lead to trade diversification through increased resilience to movements of demand, enhanced productivity, inclusion of small enterprises, innovation and shift to higher value-added products.

AfCFTA will improve export sophistication across the continent to integrate regional and global value chains and increase the quality of exports.

The writer is the Project Promoter and Lead Franchise Consultant at Africa Franchising Accelerator Project aimed at achieving faster African socio-economic integration under AfCFTA.

We work with country apex private sector bodies to increase the uptake of franchising by helping indigenous African brands to franchise. We turn around struggling indigenous franchise brands to franchise cross-border.

We settle international franchise brands into Africa to build a well-balanced franchise sector.

We create a franchise-friendly business environment with African governments for quicker African economic integration.

wambugu.wagichohi@worldaheadafrica.com, franchising@tpsftz.org

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