Africa’s Free Trade Area- An Opportunity For Recovery and Development
At a time of multiple, overlapping global challenges – from climate change to energy shocks to rising inflation and a cost-of-living crisis – the Africa Continental Free Trade Area (AfCFTA) offers promise not only for the region but for the world.
The AfCFTA, established in 2018, will create the world’s largest free trade area, bringing transformative change and tremendous opportunity to African economies and business environments. Its adoption and implementation will accelerate intra-African trade and develop regional and local value chains, creating new business dynamics that offer investors access to a population of 1.7 billion people with combined business and consumer spending reaching $6.7 billion by 2030.
Global businesses have an important role to play in accelerating the implementation of the AfCFTA, according to a new report from the World Economic Forum, in collaboration with the AfCFTA Secretariat and Forum partners. The report outlines high-potential sectors, initiatives to support business and investment, operational tools to facilitate the AfCFTA, and illustrative examples from successful businesses in Africa to guide businesses in successfully entering and expanding in this area.
The AfCFTA Secretariat selected four key sectors that represent high-potential opportunities for companies looking to invest in Africa: the automotive industry, agriculture and agro-processing, pharmaceuticals, and transportation and logistics. These four sectors are expected to see rapid acceleration in production and trade volumes under the AfCFTA, given that they have a high potential to meet local demand with local production. Until now, local demand for these goods and services is currently being met through relatively high-cost imports, despite the region’s growing and lower cost production capabilities.
While the AfCFTA offers business opportunities in each of these four sectors, companies will also need to understand how the changing environments under the trade agreement will affect their strategies for success in the region. The World Economic Forum is actively working toward implementing trade and investment tools that are aligned with the negotiation process of the AfCFTA by identifying areas where public-private collaboration can help reduce barriers and facilitate investment from international firms.
For example, public-private collaboration centered around implementing AfCFTA trade-facilitating provisions can facilitate trade in goods, on-the-ground initiatives can address fragmented investment regulatory frameworks, and bringing together groups committed to 4IR technology, digital payments, and information exchanges can support digital trade. To improve the societal outcomes of trade, the Forum’s Inclusive Trade Initiative is uncovering best practices that can be shared with AfCFTA negotiators and businesses. And an inventory of 25 key climate technologies and with country-specific studies helps identify opportunities for trade to align with circular economy goals.
Guidance for success
Companies can also look to five new operational tools as they adjust to the changing dynamics under the trade agreement.
The AfCFTA Guided Trade Initiative has facilitated the start of trade in eight countries for 96 products, providing support and guidance on customs clearing and while gathering information on how to make the process more efficient for the private sector.
The Pan-African Payment and Settlement System enables users to make near-instant payments in their local currency without needing to convert to a foreign currency or use a third-party institution.
The AfCFTA Adjustment Facility Fund is a combination of a base fund, general fund, and credit fund, that assists governments and the private sector in addressing short-term disruptions through financing, technical assistance, and grants and compensation funding.
The AfCFTA Private Engagement Strategy helps companies to better understand the overall continental strategy as well as the specific initiatives and policy recommendations in emerging sectors that the AfCFTA is prioritizing.
And the Rules of Origin Manual & E-Tariff Book sets the guidelines for the rules and procedures for determining the origin status of goods and makes information on duty rates easily searchable and comparable.
In addition, analysis of on-the-ground experience from companies including Agility, AFC, Coca-Cola, DP World, Menzies, Novartis, OCP, UBA, Volkswagen, and Yara, has revealed three main strategies that have led to success in Africa and can provide invaluable lessons to companies planning to seize the opportunities opened by the trade agreement.
The first strategy is to form local partnerships with governments, local institutions, universities and others to create regional hubs and host R&D at local universities. The second strategy is to leverage key trade accelerators such as investing in local infrastructure and logistics, with opportunities ranging from food storage to partnering with local organizations to move various parts of the value chain onto the continent. The third strategy is to form integrated ecosystems by developing end-to-end value chains around local resources, which de-risks projects and creates an environment where shared infrastructure can support multiple projects in different sectors.
The global private sector must be prepared for the changes in trade dynamics ahead on the continent to seize the opportunities that the AfCFTA brings, achieving business success while helping to usher in a new era of economic development.
With a growth rate of 4.5% in 2021, sub-Saharan Africa’s economy was starting to recover from the worst effects of the COVID-19 pandemic but this progress has been jeopardized. The war in Ukraine has increased the global prices of key commodities. Most notably, surging oil and food prices are straining the fiscal balances of many countries and have increased food insecurity concerns. Worryingly, 39 million more people fell into extreme poverty in 2020 and 2021, reversing a long-term trend of decreasing poverty.
In this context, sub-Saharan Africa imports about 85% of its wheat, and several countries source a large proportion of these imports directly from Ukraine and Russia. Indeed, lessons learned from the pandemic – related to the supply of personal protective equipment and vaccines – have underscored that the region needs to achieve free but secure trade. Looking ahead, policymakers will need to navigate this uncertainty with fewer policy options.
Key benefits of implementing the AfCFTA
Accelerating the implementation African Continental Free Trade Area (AfCFTA) would provide the region with much needed stimulus and drive the region’s long-term recovery and growth. Comprising 55 countries with a population of 1.3 billion and combined GDP of about $3.4 trillion, the AfCFTA is the largest free trade area in the world, both by area and by the number of countries. Currently, 54 of the 55 African countries have signed the agreement, and 41 countries having ratified it.
Deeper integration would boost incomes, create jobs, catalyze investments, and facilitate the development of regional supply chains. Intra-African trade remains small compared with the continent’s external trade. In 2020 just 18% of exports were to other African countries, lower than the equivalent shares in North America (30%), Asia (58%) or Europe (68%).
Moreover, the World Bank estimates that, if implemented properly, by 2035 the AfCFTA is set to lift 30 million Africans out of extreme poverty and 68 million from moderate poverty. The same study finds that the AfCFTA has the potential to increase intra-African trade by 81% and boost wages by 10% by 2035.
Importantly, intra-African trade comprises a smaller share of commodities, and a higher share of manufactured goods, than Africa’s trade with the rest of the world. More specifically, primary commodities account for over 70% of inter-African exports; however, the share of manufactured goods in intra-African exports is about 45% with primary commodities accounting for a third. Therefore, intra-Africa trade is less exposed to the volatility of global commodity prices and optimized to effect structural transformation. Accordingly, African policymakers have more agency in shaping a recovery that shifts away from commodity dependency and towards regional integration.
Although the AfCFTA has in theory been operational since January 2021, in practice no trade has occurred under its terms due to pandemic-related delays. However, early this year, signatories agreed to rules of origin for 87.7 % of the tariff lines (the goals to liberalize 90% of tariff lines). This agreement on tariffs should enable trading to begin once the governments have enacted domestic changes to the respective tariffs.
However, even after tariffs are lowered, and simplified procedures put in place, the full benefits of the AfCFTA will not be realized unless non-tariff barriers to trade are also addressed. According to the IMF, removing non-tariff barriers could be up to four times more effective in boosting trade than tariff reductions.
Under the Global Alliance for Trade Facilitation, the World Economic Forum has shown that these restraints can be weakened. Moreover, members of the Regional Action Group for Africa recently published a white paper that explores digital solutions for increasing efficiencies at land borders and ports in order to realize greater benefits from trade.
How public-private collaborations can help
The work we do at the Forum has never been more important and this year’s Annual Meeting will offer a crucial opportunity to understand and respond to the implications of current global events.
During the meeting, the Forum will convene the Forum Friends of the Africa Continental Free Trade Area: a multistakeholder group that aims to support the implementation of the AfCFTA through public-private collaborations. The multistakeholder group comprises: Paul Kagame, President of Rwanda, Office of the President of Rwanda; Wamkele Mene, Secretary-General, African Continental Free Trade Area Secretariat; Patrice Motsepe, Founder and Executive Chairman, African Rainbow Minerals; and Jim Ovia, Chairman, Zenith Bank among others.
The private sector has a crucial role to play in promoting regional integration and cooperation. It understands the constraints facing enterprises and is in a position to act on opportunities created by this pact.
In addition to trade, the private sector can contribute through infrastructure investments. Inadequate infrastructure and connectivity are a serious obstacle to the growth of intra-African trade. Poor roads, rail and maritime infrastructure adds 30-40% to the costs of goods traded among African countries. The African Development Bank estimates that the continent’s infrastructure needs to amount to $130-170 billion a year, with a financing gap in the range of $68-108 billion.
At a time when the multilateral trading system is under severe strain, Africa must seize the opportunity to boost its recovery and development by implementing the AfCFTA.
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Mark G. Darko, Accra
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