As World Wavers on Free Trade, Africa Embraces It: QuickTake

(Bloomberg) -- Amid trade tensions between the U.S., China and Europe, and the U.K.’s fraught departure from the European Union and single market, African leaders are moving in the opposite direction to establish the world’s largest free-trade zone. The African Continental Free Trade Area formally went into effect in May, four years after negotiations began. If it comes to full fruition, the deal could cover a market of 1.2 billion people with a combined gross domestic product of $2.5 trillion.

1. Who’s in the free-trade agreement?

Just about the entire African continent. All but one of the 55 countries recognized by the African Union have signed on to the organization’s initiative to liberalize intra-African trade in goods and services. (Eritrea, which has a largely closed economy, is the sole holdout.) Almost half of their governments have ratified it, and the deal is set to kick in starting next year.

2. What would the African Continental Free Trade Area do?

Among other things, it aims to lower or eliminate cross-border tariffs on 90% of goods, facilitate the movement of capital and people, promote investment and pave the way to the establishment of a continent-wide customs union. It will also create a liberalized market for services. Once members work out how to treat matters such as cross-border payments, telecommunications, transport and professional services, some countries will have to amend their domestic regulations to comply.

3. Has trading under the agreement started?

Not yet. The trade area entered into force on May 30 after the required minimum of 22 nations ratified it. But countries still haven’t worked out the “rules of origin” -- which determine the nationality of goods -- or tariff concessions. It’s a two-phased negotiation, with talks on the protocols for trade in goods, services and dispute settlement now under way. The next stage will deal with competition policy, intellectual property rights and investment protocols. Members want trading under the agreement to begin by July 2020, moving to full operation in 2030 as more countries join the pact.

4. What’s slowing things down?

Tariffs are an important revenue source for many governments and are often used to protect domestic industries, so letting go of them will require some adjustment. Depending on the outcome of negotiations, South Africa and Nigeria, the continent’s largest economies, may have to eliminate 90% of their tariff categories over a five-year period. Others such as Ethiopia, Sudan and Zimbabwe may have to do so over 15 years. If history is any guide, implementation could take some time. The Tripartite Free Trade Area -- a precursor of the AfCFTA that sought to combine the Common Market for East and Southern Africa, the East African Community and the Southern African Development Community -- was signed almost three years ago and still hasn’t gone into effect.

5. What’s intra-African trade like today?

Shipments among African countries now account for about 15% of the continent’s total trade, compared with 20% in Latin America and 58% for Asia, according to the African Export-Import Bank. That share could more than double within the first decade after the AfCFTA, the bank estimates. Most trade takes place in existing regional economic communities, with the Southern African Development Community comprising more than 65% of the total, according to figures from the Trade Law Centre in Stellenbosch, South Africa. That’s largely powered by South Africa, the continent’s most industrialized economy. Freight elsewhere has been hampered by non-trade barriers such as poor road and rail networks, delays at border posts and in some cases ill-trained or corrupt customs officials. Some experts say removing such hurdles could do more to boost continent-wide trade than AfCFTA itself.

6. Who could benefit most?

Countries such as South Africa and Kenya -- with larger manufacturing bases and better road networks, railways and ports -- are most likely to gain from further regional integration, says Moody’s Investors Service. For others, poor infrastructure and non-tariff barriers, such as cumbersome government regulations, could continue to restrict the trade sector’s development and long-term growth potential, despite liberalization.

7. What will happen to existing regional economic communities?

While the agreement recognizes eight decades-old trade communities as the building blocks of AfCFTA, the continent-wide deal will take precedence if there’s a conflict or inconsistency. If tariffs among existing regional trade blocs and customs unions are already lower than the continent-wide deal provides for, the lower rates will remain in place.

The Reference Shelf

  • The agreement establishing the African Continental Free Trade Area.
  • The African Union overview on the continental free trade area.
  • A Q&A on AfCFTA by African Trade Policy Center.
  • African Export-Import Bank 2019 African Trade Report.
  • A Bloomberg QuickTake explaining free trade.
  • For more on what central banks are doing to implement the trade pact.
  • Tralac’s African Continental Free Trade Area archive.
  • A United Nations article on tariff liberalization.

©2019 Bloomberg L.P.

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