Once fully implemented, the African Continental Free Trade Area (AfCFTA) will unlock significant but uneven growth opportunities on the continent. According to research from Baker McKenzie and Oxford Economics, AfCFTA's US$ 3 trillion Opportunity: Weighing Existing Barriers against Potential Economic Gains (research), countries with good trade integration and open economies are most likely to benefit first from lower trade tariffs. However, numerous obstacles across the continent mean that the tangible benefits of the agreement will likely only be realized from 2030.
“Nigeria’s first obstacle is that although the AfCFTA Agreement has been signed, it is yet to be ratified, so it does not have the force oflaw in the country. Section 12 of the Constitution states that an international treaty or agreement entered into by Nigeria will not have automatic application in the country unless the treaty or agreement has been domesticated by an Act of the National Assembly. The AfCFTA is expected to take effect in July 2020, but no timeline has been set as yet for the implementation of the AfCFTA Agreement in Nigeria,” says Ijeoma Uju , Partner at Templars law firm in Lagos. Uju was speaking at the African Trade Show in Lagos this week, hosted by global law firm Baker McKenzie and Templars in Nigeria.
Mattias Hedwall, Partner and Global Chair of Baker McKenzie’s International Commercial & Trade Group, noted at the event in Lagos that countries that have created more open, business-friendly environments stand to make the biggest gains from AfCFTA.
“The AfCFTA agreement will create the world’s largest free trade zone by number of countries and is expected to revolutionise trade across the continent. Once implemented, it will lead to sustainable socio-economic development, increased diversification, a boost in investment, trade liberalisation, the industrialisation of African economies, the establishment of new cross-border value chains and better insulation from global shocks,” he said.
Trade between countries in Africa, however is currently not high. Baker McKenzie’s research shows how trade links between Africa and the rest of the world are, at present, often stronger than trade between countries on the continent. African nations currently tend to trade more with Europe (35%) and Asia (31%) than with neighbouring markets. In contrast, less than a fifth of African countries’ exports are headed to other countries on the continent.
“These intracontinental trade shortcomings underscore the extent of lost revenue and development opportunities for African countries. They also highlight the benefits of supporting the AfCFTA and working together towards its successful implementation,” explained Hedwall.
The research compares Africa’s 20 largest economies in terms of the share of exports destined for other economies on the continent. Some economies, such as Uganda and Zimbabwe, buck the overall trend, trading more with their neighbors than other African nations do. Yet, their economies are small in contrast to those of Egypt, Nigeria and South Africa, which together represent more than half of the continent’s GDP. Egypt and Nigeria have very limited trade relationships with their African peers, because as major fuel exporters, they are more focused on exports outside the continent.
“Over three quarters of African exports to the rest of the world are heavily focused on natural resources, primarily raw materials. In contrast, a look at African imports from outside the continent reveals that manufacturing products, industrial machinery and transport equipment constitute over 50% of Africa's combined needs. Currently, Africa's external imports account for more than half of the total volume of imports, with the most important suppliers being Europe (35%), China (16%) and the rest of Asia including India (14%). By contrast imports from other parts of Africa account for only 16% of total merchandise imports,” said event panellist Virusha Subban, a Partner specialising in Customs and Trade at Baker McKenzie in Johannesburg.
“Manufacturing GDP represents on average only 10% of GDP in Africa. This means that limited production capabilities within Africa are currently being compensated for through foreign imports. Yet, this manufacturing deficit could be eventually satisfied within the continent and enabled by AfCFTA. Manufactured products currently exported to African countries by their peers, primarily industrial machinery and motor vehicles, represent a third of the total trade flow in Africa. But a significant share of these intraregional exports of manufactured goods are re-exports of imported manufactured products from the rest of the world,” she said.
“This shows that African nations do not trade more with each other because of a misalignment between what various African countries need and what is produced on the continent. This misalignment signals missed opportunities to reduce foreign imports from outside Africa and increase trade flows within the continent. For AfCFTA to succeed fully, more countries need to diversify their production of goods to better match the import needs of their continental neighbours,” she noted.
Ijeoma noted further, “One of the benefits of the trade agreement for Nigeria is that the elimination of tariff and non-tariff barriers will grant Nigerian businesses access to the continental market. A further benefit includes that Nigeria will secure a more balanced and sustainable export base by moving away from extractive commodities, such as oil and minerals, which have traditionally accounted for most of its exports. Manufacturers and producers will also benefit from economies of scale and access to cheaper raw materials and intermediate inputs and competition in the quality of good and service will improve. Jobs will be created, the platform for Small and Medium Enterprises (SMEs) integration into the regional and continental value chains will be expanded. Additionally, it will provide access to new dispute resolution mechanisms and will result in the progressive liberization of the service sectors.”
The research underscores the importance of also addressing non-tariff barriers to intra-regional trade. Some of the most significant non tariff barriers to AfCFTA are inadequate infrastructure, poor trade logistics, onerous regulatory requirements, volatile financial markets, regional conflict and complex and corrupt customs procedures. These can be even more detrimental to trade expansion than tariff measures. As such, AfCFTA is expected to act as a strong impetus for African governments to address their infrastructure needs as well as to overhaul regulation relating to tariffs, bilateral trade, cross-border initiatives and capital flows. Both domestic and foreign trade will benefit from reforms to regulation, political climate and trade policies that enhance competitiveness and improve the ease of doing business.
Nigeria will be better positioned to benefit from AfCFTA once it improves the business environment and addresses gaps in its transport and utilities infrastructure,” noted Ijeoma.
“We have to be realistic about timeframes, however, as effective solutions will take years, given limited financial capacity in many countries, high risks to private financing of infrastructure, political hurdles, administration shortfalls and lack of resources. So while there are still numerous challenges to be resolved, we expect that if the barriers can be addressed, the next decade will see the growth of AfCFTA into one world’s most exciting new global trading zones,” added Hedwall.