African Continental Free Trade Area Agreement: Pains and Gains of Liberalisation

On Wednesday 21st March 2018, African Leaders gathered at an extraordinary summit of the African Union (AU) in Kigali, Rwanda to sign an agreement which established the African Continental Free Trade Area (AfCTA). The decision to establish the free trade area, which is poised to be the World’s largest free trade area in terms of participating members since the creation of the World Trade Organization, stems from the 18th Ordinary session of the AU in 2012 where member nations agreed to establish the free trade area by 2017.

The AfCTA would effectively create a single continental market for goods and services, through the reduction or possible elimination of trade barriers such as tariffs and import duties, hence allowing free movement of goods, services and people between member states with the aim of boosting regional business integration and growth in the region. According to the United Nations Conference on Trade and Development (UNCTAD), intra-Africa trade is amongst the lowest in the World at 16.0% of total regional trade. Of the total continental trade, Regional Economic Communities (such as ECOWAS and SADC) account for 80.0% while five countries - Algeria, Cote d’Ivoire, Egypt, Nigeria and South Africa - contribute over 60.0% of all intra-Africa trade volumes.

With the implementation of the Free Trade Agreement, United Nations Economic Commission for Africa (UNECA) estimates that the AfCTA could boost intra-Africa trade by $35.0bn by 2022 and also lead to a 6.0% rise in continental export. An independent assessment carried out by UNCTAD in February 2018 estimated that, based on a pessimistic scenario of exemption of sensitive products from liberalization, AfCTA will buoy intra-Africa trade by 24.0%, shrink trade deficit by 3.8%, boost growth and employment (by 1.0% and 1.2% respectively) and contribute US$10.5bn to economic welfare. A more optimistic scenario, which assumes full implementation, estimates AfCTA will increase economic welfare by US$16.1bn, increase GDP growth by 0.7%, reduce unemployment by 0.8%, boost intra-Africa trade by 33.0% and halve regional trade deficit.

Despite the substantial estimated benefits of the agreement, UNCTAD, in the same report published in February 2018, highlighted some short and long term challenges of adopting a free trade area in Africa. In the aftermath of trade liberalization, many participating economies may struggle to grapple with the realities of short-term pains of adopting free trade such as reduced government revenue from import tariffs – which accounts for significant proportions of government budgets - and changes in different sectors of the economy possibly leading to spikes in unemployment and underemployment rates. For instance, UNCTAD estimated that up to 7.2% - 9.1% of current revenue (translating to US$3.2bn - US$4.1bn of tariff revenue) would be lost depending on the scale of implementation.

However, countries would in the long term, have greater incentive to adopt specialization strategies in production of certain goods in which they have competitive advantage, thus allowing for better use of economic resources. In addition, trade liberalization would lead to lower import and consumer prices, while also providing broader choice of products with improved quality. Furthermore, local companies and producers would have unrestricted access to bigger markets and as such, gain from economies of scale. While competition left unchecked could be a cause of concern, competitive pressures would require companies to become more efficient in resource allocation and innovation.

In spite of the well documented benefits of the Agreement for the Region and individual economies, 10 of 55 AU member-states (Zambia, Nigeria, Botswana, Lesotho, Namibia, Burundi, Eritrea, Republic of Benin, Sierra Leone and Guinea Bissau) declined to sign the treaty while South Africa delayed ascent to allow local agencies carry out necessary reviews. President Mohammed Buhari had, prior to the AU summit, announced that Nigeria would not be signing the treaty due to concerns of dumping and protests from manufacturing and labour unions seeking greater stakeholder consultation.

Nigeria’s last minute withdrawal is particularly surprising given the leading role it has played in the negotiation process thus far. Nigeria’s Chief Trade Negotiator, Ambassador Chiedu Osakwe chairs the 55-member Negotiating Forum, while the Minister of Industry, Trade and Investment Dr. Okechukwu Enelamah, chaired the African Ministers of Trade (AMOT) meeting which approved the framework agreement establishing AfCTA. At the 30th Assembly of African Union (AU) Heads of State in January, President Buhari popularly declared his support for the Trade Agreement, reflecting that, “In a rapidly changing global economy, with much uncertainty, we believe that the establishment of a Continental Free Trade Area would provide Africa with tremendous opportunity to achieve significant growth driven by intra-Africa trade were raised.”

Given the importance of the regional market to Nigeria, we think the country’s no-show at the AU meeting could be counterproductive. Reported merchandise trade (imports + exports) between Nigeria and Africa reached N2.0tn (US$6.5bn) in 2017 although actual numbers could be much higher due to the huge volume of reported smuggling activities in Nigeria’s Southern (petroleum products and processed food) and Northern borders (agricultural commodities and petroleum products). Based on reported trade figures, Nigeria has the upper hand in terms of trade balance with a trade surplus of N1.2tn or US$4.2bn with its African neighbours in 2017. The region is also the largest destination for Nigeria’s manufacturing export (38.0% of total manufactured goods export in 2017 – N108.5bn or US$355.7m) and more recently solid mineral exports (53.5% of total – N22.6bn or US$74.1m).

Perhaps, the skepticism towards entering the trade deal stems from fears of exploitation of the free trade corridor by competitive Asian countries to indirectly access the Nigerian market; yet, negotiations for a common external tariff which is expected to take-off subsequent to signing the AfCTA will partly address this. Ultimately, we think the strategic importance of the regional market will get Nigeria back to the negotiating table, but the country might push its luck too far if other regional rivals unite before it joins.




Afrinvest

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