How can the new African free trade agreement unlock Africa’s potential?


By Professor Landry Signé, David M. Rubenstein Fellow in the Global Economy and Development Program and the Africa Growth Initiative at the Brookings Institution, Distinguished fellow at Stanford University’s Center for African Studies, Chairman of the Global Network for Africa’s Prosperity, and author of “Innovating Development Strategies in Africa: The Role of International, Regional and National Actors.

Learn more about this timely topic at the upcoming
18th International Economic Forum on Africa

Africa-TradeAfrica has an opportunity to show leadership on the world stage through strength in unity, as the rest of the world retreats from multilateralism and increases protectionism. For the first time in recent history, with the African Continental Free Trade Area (AfCFTA), Africa could wholly embrace intra-African relations, global trade, structural transformation and sustainable development. But for the agreement to succeed, businesses, which make up the backbone of the deal, need to be aware of their potential gains and be actively involved in its implementation, working alongside governments and regional institutions that are ultimately responsible for speeding up the process.

The challenges to African trade have been immense: Africa only represents 2.4% of total global exports. Intra-African trade only represents 15% of total African exports (compared to 58% and 67% for Asia and Europe, respectively), even if the regions of Eastern and Southern Africa are outperforming Central Africa.

The AfCFTA, launched with signatures from 44 African countries in March, has the potential to open up the free movement of goods, services and people, building the capacity of African businesses. If successfully implemented, the AfCFTA could generate a combined consumer and business spending of USD 6.7 trillion by 2030, accelerate industrial development, expand economic diversification, and facilitate quality job creation — including for youth (72% of poverty rate), women (majority of small-scale traders), and small and medium-sized enterprises (SMEs) (about 80% of regional employment).

But all this will depend on how well businesses are able to engage in the deal’s implementation. These are a few things they need to know:

First, over the next five years, almost half of the world’s fastest growing economies will be located in Africa, growing at an average rate of 5% or higher. The African business-to-business spending will reach USD 4.2 trillion in 2030, an increase from USD 2.6 trillion in 2015. Business funding will be about USD 915.3 billion in agriculture and agricultural processing, USD 666.3 billion in manufacturing, USD 784.5 billion in construction, utilities and transportation, USD 665.1 billion in wholesale and retail, USD 357.6 billion in resources, USD 249.3 billion in banking and insurance, and USD 79.5 billion in telecommunications and IT.

Second, Africa’s household consumption will be about USD 2.5 trillion in 2030, an increase from USD 1.4 trillion in 2015. Consumer spending will be about USD 740 billion in food and beverages, USD 397.50 billion in education and transport, USD 390 billion in housing, USD 370 billion in consumer goods, USD 260 billion in hospitality and recreation, USD 175 billion in health care, USD 85 billion in financial services, and USD 65 billion in telecommunication. By 2030, in fact, more than 40% of Africans will belong to the middle or upper classes, with discretionary income, and will demand more and more goods and services. This growth in domestic consumer demand combined with more business-to-business spending will allow both large businesses and SMEs to gain the most under the AfCFTA. As the profile of African businesses grows on continental and world stages, African household consumers may be more inclined to buy African products and services to support continental development and growth. Additionally, cutting tariffs on 90% of goods will increase the diversity of goods that African businesses can export to other African countries and abroad. This diversity of production and services will place African businesses at the forefront of country development.

And, third, the AfCFTA would create a single market for all African nations to better negotiate prices and production levels, making Africa an integrated, sophisticated economic partner within the global market. Opportunities for Africa to compete at the international level exist in sectors related to motor vehicles and transport equipment, refined petroleum, computers, and office and industry machineries. Countries that are “network ready” have the human capital, potential for infrastructure development and access to the consumer markets that will provide substantial returns on investment. The free trade area will also reduce or eliminate the costs of obtaining visas and work permits, so businesses will be more able to participate in intra-Africa trade at a cost-effective level, with even SMEs benefiting from greater market access. The incentives are clear for the African business community to push their governments to wholly commit to the AfCFTA’s ratification and implementation.

So what is the priority for moving forward?

Accelerating the implementation of the AfCFTA and regional integration means completing various negotiations, submitting tariff concessions schedules, ratifying to have the AfCFTA come into force, and providing resources for it to fully achieve its vision and mission. Each country could create a President- or Prime Minister-supported AfCFTA implementation or delivery unit, hosted in the highest office in the nation, to accelerate the negotiation process in close collaboration with ministries of trade and the business community.

Another priority that will help make African businesses more competitive in the context of AfCFTA is to invest in human capital in two concrete ways. First, create curricula to train people in workforce-ready skills, including in industries without smokestacks such as tourism, information and communications technology (ICT), and agri-processing. For example, between 1998 and 2015, service exports expanded significantly more than merchandise exports, and tourism is some countries’ largest export activity, so training should be adjusted to the future of work in these sectors. The ICT sector, for instance, can harness the power of Africa’s human capital, create a market within Africa for high-skill and high-paying jobs, and positively affect the development of manufacturing, agriculture, infrastructure, and many other sectors. Second, pass policies that favor the migration of highly skilled workers across the continent. Other priorities include developing appropriate infrastructure, creating jobs, diversifying industries, investing in technology, facilitating access to finance and lowering the cost of doing business.

Ultimately, the challenge to scale up and speed up continental integration and successful implementation of the AfCFTA lies with governments. National policymakers – working closely with business leaders – must agree on continent-wide approaches and standards that prioritise free trade and the development of human capital, training, education, clean industries, and a conducive environment for doing business. Africa needs to act in these ways to fully unlock the continent’s potential, and the time to do so is now. The world is watching.