The African Continental Free Trade Area (AfCFTA) is an ambitious initiative, full of promise for Africa and beyond. It comes at a time when the continent faces many development challenges. Africa hosts the largest group of developing countries in the world, of which 33 are least developed countries, and 16 are landlocked developing countries.
Introduction
With the adoption of the Agreement Establishing the African Continental Free Trade Area (AfCFTA) in May 2018, a new impetus has been given to Africa’s regional integration. The AfCFTA promises to connect 1.4 billion people across 54 of the 55 African countries (Eritrea is not participating), spanning of a market with a combined GPD of 3.4 trillion USD. It envisages the free movement of goods, services and people, and provides for continental rules on competition, investment, intellectual property, digital trade, and women and youth.
When looking at Africa’s recent trade performance, there was a positive post-pandemic rebound. Trade grew from $589 billion in 2021 to $689 billion in 2022. This 2-digit growth was above what was witnessed globally and in other regions. Nonetheless, the narrative of the continent’s poor participation in global trade has not changed. Africa’s share of world trade has hovered around 3% over the last decade, as shown in Figure 1. Though stable, this trade is overshadowed by the shares of other regions, for example Asia trading as much as 40% and Europe 37% of the global total.
Africa’s share in global trade hardly does justice to the continent. Africa hosts 25 per cent of global population, representing a consumer market which had an estimated worth of $1.4 trillion in 2015, and is projected to grow to $2.5 trillion by 2030. In this context, the AfCFTA forms part of the African Union’s Agenda 2063, which is the blueprint of Africa’s future vision. The AfCFTA is therefore seen as an opportunity for Africa to overcome major development challenges and integrate better through trade, both regionally and globally.
State of Play of the AfCFTA Negotiations
Since the historic entry into force of the Agreement which brought the AfCFTA to live in 2019, there has been important progress. A total of 47 of the 54 States Parties have ratified the agreement so far.
For trade in goods, an ambitious target has been set to achieve tariff liberalization for 97% of trade. State Parties, either in their individual capacity or as part of a Regional Economic Community (REC), have submitted tariff offers detailing goods subject to duty free trade, and also listing goods that are sensitive or excluded, representing the remaining 3% of trade.
For trade in services, negotiations have advanced in 5 priority sectors, namely business, communication, financial, tourism and transport services. Services schedules detailing the level of national treatment and market access afforded in these sectors have been submitted. In future liberalization rounds, other sectors will be negotiated, though some countries have already made offers in non-priority sectors such as health, education and recreational services.
Both for goods and services, the submitted schedules of commitments have and are undergoing technical verification processes to ensure they are compliant with what was agreed. To facilitate commercially meaningful trade in goods and services under the AfCFTA, there are also Guided Trade Initiatives in place for countries in need of support.
For the so-called AfCFTA phase II of negotiations, 3 protocols providing common rules on intellectual property, investment and competition, respectively, were adopted in February 2023. State Parties are now negotiating two additional protocols, on women and youth, and on digital trade, respectively. These are considered critical to unlock the full benefits of the AfCFTA, since women and youth are the backbone of the private sector and digital trade is a very dynamic sector, growing at a rate of 40% annually, and expected to exceed US$ 300 billion by 2025.
Accompanying the AfCFTA, the African Union members have also signed protocols supporting the free movement of persons and a single African air transport market, which are deemed to facilitate the mobility of people on the continent and free the commercial air transport market from various impediments, once they enter into force.
Expected Gains and Impacts of the AfCFTA
Historically, the composition of African trade has been characterized by trade of primary commodities with little value added. Though there has been some diversification in the destination of trade, increasingly with Asia and also with the continent itself, trade with Africa’s traditional partner Europe is still very dominant. As shown in Figure 2, on average, between 2016 and 2022, the EU led as Africa’s first trade destination, representing more than a quarter of the continent’s trade with the world (28.6% of its exports and 26.9% of its import shares, respectively). Of this trade, African exports and imports to and from Austria registered a 0.3% share of the global total on average.
The second place for Africa’s trade destination was tightly wrung between the continent itself and China. Intra-African exports represented 15.5% of Africa’s global trade share, closely followed by China (14.9%) and India (6.8%). African imports from China represented 17.8% of its global total, compared to 14%, 9.1% and 5% from Africa, the Americas and India, respectively. Trade with the rest of the world on average comprised almost a third of total African exports at 31.6%, and just over a fourth of total African imports at 26% for 2016-2022.
When taking a closer look at trade with Africa’s main trading partner, there are notable differences in the composition of the continent’ import and export patterns. As shown in Figure 3 below, African exports to the EU are primarily be characterized as a trade in extractive commodities, namely fuels (46%), followed by manufactures (28%) and food (14%), where there is generally little value addition from the continent. In comparison, when considering African imports from the EU, over two thirds are manufactures (67%), dwarfing processed food and fuels, each of the latter registering a 13% share. In contrast, intra-African trade paints a different picture. Within the continent, there appears to be more trade sophistication, with manufactures (45%) leading, followed by fuel (21%) and food items (20%).
With the AfCFTA, these trade patterns are expected to change. It is estimated that by 2045, intra-African trade will be 34% higher than without the AfCFTA. Trade in sectors such as agri-food, services and industries will increase by 49.1%, 37.9% and 35.7%, respectively. The expected increase in energy and mining will be lower, at 19.4%. With the AfCFTA, the value of intra-African trade is expected to increase with 577% by 2045 (as compared to a 405% increased in a scenario without the AfCFTA). This would translate into a net gain of intra-African trade creation estimated at USD 195 billion and the share of intra-African trade would expand from 15% today to over 26% by 2045.
Currently, the demand for trucks to transport bulk cargo in 2019 was registered at 698,000. Without the AfCFTA and infrastructure development as initially planned, this demand would only grow to 1.3 million, as compared to a full AfCFTA and infrastructure development scenario in 2045 where the demand for trucks for bulk cargo would increase to 1,9 million by 2030. Intra-African trade in transport services has the potential to increase by nearly 50%, whilst in absolute terms, over 25% of intra-African trade gains in services would go to transport alone; and nearly 40% of the increase in Africa’s services production will be in transport. This is encouraging when considering transport costs in Africa, which range from 15 to 20% of import costs, representing double and even threefold of the costs developed countries bare.
Trade and Investment Opportunities in Africa
Given the estimated gains and dynamic impacts of the AfCFTA, there are sizeable opportunities through Africa’s trade integration. The expected increase in market size will spur market efficiency, making Africa a more attractive destination of foreign investment and trade.
There is scope for deeper and services-based industrialization from within the AfCFTA as shown by the estimates for 2045. This trade is also expected to increasingly include intermediary goods for further processing within the continent, bolstering regional value chains.
Unlike world FDI which targets the natural resources sector, intra-African investment gravitates more towards services, particularly insurance, retail banking and telecommunications. The AfCFTA is thus an important vehicle to promote intra-African trade and investment, especially in the more dynamic sectors. For example, because of the new trade demand from the AfCFTA the increased need for trucks, rolling stock, aircrafts and ships translates into an investment opportunity of USD 411 billion. In sum, the AfCFTA opens opportunities for (both domestic and foreign) companies already operating on the continent, or for those thinking to establish a production base to source the African market.
Existing Challenges and Concerns of the AfCFTA
Though the AfCFTA is at its early stages, there are some important challenges and concerns. These range from multiple and overlapping REC memberships (see Table 1), to trade adjustment costs, the coexistence with other trade agreements and previous commitments and the capacity of the countries to domesticate the various protocols into national laws, policies and legislation in a timely fashion.
Among these, a major question is how the AfCFTA is going to coexist with other agreements and obligations which are already in place or being negotiated with other regions, such as the EU and China. With the EU, some countries have economic partnership agreements in place (see Table 1). The AfCFTA agreement will require countries to revisit such agreements considering the newly acquired obligations.
The AfCFTA is anticipated to contribute to reducing the current trade dependency on primary commodities of Africa on its external partners, including the EU and China, particularly in terms of industrial imports which could ultimately contribute to closing trade deficits of African countries with external partners. This is an opportunity for a shift towards more value added and intermediary trade patterns, from which Africa and its trade partners from beyond the continent stand to gain.
The Way Forward
The AfCFTA brings unprecedented opportunities for Africa’s transformation, competitiveness, and development. Though aspects of the AfCFTA negotiations are still evolving, it is important to monitor and support the implementation process of the agreement.
Effective implementation of the AfCFTA, will require the joining of efforts and various partnerships across global and regional spheres, which could help Africa and its business partners capitalize on the expected benefits and opportunities this megaregional has to offer.
Author:
Laura Páez is currently guest researcher at the Vienna Institute for International Economic Studies (wiiw). She is an international development practitioner with more than twenty years of professional experience. She is currently appointed to the United Nations Economic Commission for Africa (ECA), where she heads the Market Institutions Section. Previously she headed the Investment Policy Section at ECA. Her current work focuses on generating knowledge on the regulatory and policy dimensions across investment, competition, intellectual property, services and digitalization in Africa, geared to support regional integration processes such as the African Continental Free Trade Area.
Prior to her current appointment at ECA, Laura Páez worked at the United Nations Conference for Trade and Development in Geneva on issues pertaining to Africa’s economic development in the context of the continental’s trade and development agenda.
The interactive graphics were created by Alireza Sabouniha. He is a research assistant at wiiw and recently completed his master’s degree in Economics at the WU (Vienna University of Economics and Business).