African Continental Free Trade Area Roadmap: Potential Benefits to Kenya and the African Continent

African Continental Free Trade Area Roadmap: Potential Benefits to Kenya and the African Continent

The African Continental Free Trade Area (AfCFTA) is a flagship project of the African Union (AU) Agenda 2063 in advancement of the Abuja Treaty, which established the roadmap towards an African Economic Community. The Treaty’s aims are much broader than trade and economic integration. It aims at social and cultural development, maintaining economic stability, cooperation in all aspects of human activity with a view to raising the standard of life of Africa’s people, and establishing a close and peaceful relationship between the member States. Unlike other standard Free Trade Areas (FTA) that are only limited to trade in goods, AfCFTA agreement covers four main critical areas, including trade in goods, trade in services, competition policy, investment and intellectual property rights.

The signing of the AfCFTA agreement on 21st March 2018 by 44 countries in Kigali, Rwanda marked a significant milestone for Africa’s integration and development agenda. This makes the AfCFTA one of the largest trading blocs since the formation of the World Trade Organization (WTO). To date, 49 countries have signed the agreement while 6 have ratified and deposited their instruments with the African Union Commission. Thus, only 16 additional ratification documents by member States are required to operationalize the agreement.

One of the positive aspects of the AfCFTA is the sheer size of its market i.e. a combined population of about 1.2 billion people and US$ 2.5 trillion GDP. Despite the huge market potential within itself, the intra-Africa trade currently stands at about 12 per cent compared to 40 per cent for intra-North American, 59 per cent for intra-Asia and 69 per cent for intra- Europe trade. Regarding Kenya, the African market accounted for 38 per cent of total exports whereas imports from Africa constituted a paltry 11.6 per cent in 2017. This has largely been attributed to higher tariffs when goods are traded within the continent vis-a-vis exporting to other continents. The AfCFTA provides space to expand intra-regional trade and unlock existing business opportunities in the African continent. Reduction of tariffs and other non-trade barriers is expected to lower the cost of business, reduce prices for final goods and services, and facilitate production of a variety of products thereby increasing consumer welfare. Indeed, the United Nations Economic Commission for Africa estimates that the AfCFTA has potential to boost intra-African trade by more than 50 per cent if import duties and non-tariff barriers are eliminated from the economic bloc.

The harmonization of services regulations and gradual liberalization of trade in services is expected to generate substantial economic gains given the importance of services in generating income, employment and economic opportunities. The proportion of services traded in the total international trade lag behind its importance in overall economic activity in Africa. The low share of services in overall trade is partly due to lower tradability, under-reporting of the importance of services for overall trade in the balance of payments, and barriers to trade in services. Therefore, concluding the negotiations of the sub-agreement on trade in services in the AfCFTA would play an important role in ensuring the smooth running of the economies, and would enhance international competitiveness in trade in services once the agreement comes into force.

The AfCFTA further provides for setting of common investment rules and regulations, which would encourage investment into African countries. This is also expected to establish a continent-wide disputes settlement system in case of investment disputes.  The disputes are to be settled between involved State parties. Ultimately, AfCFTA will induce investment given the importance of trade and investment in structural transformation. It will also promote and attract investment for growth and sustainable development of the African continent.

The scope of the AfCFTA also covers competition policy, which traditionally provides for regulation of unfair trading practices, including dumping, and trade in counterfeits and subsidized goods. The regulation of competition and facilitation of dispute settlements would not only build confidence in the AfCFTA but also help build institutional capacities and expertise of member States to apply trade remedy instruments such as anti-dumping, safeguards and countervailing measures at the multilateral platform.

Besides, implementation of the AfCFTA together with the action plan for Boosting Intra-African Trade (BIAT), which was adopted by the AU Heads of State in January 2012, is expected to solidify the gains envisaged in the Abuja Treaty. The BIAT initiative, which was launched in 2012, is aimed at addressing the constraints and challenges of intra-African trade, which are organized under the clusters of trade policy, trade facilitation, productive capacity, trade-related infrastructure, trade finance, trade information and factor market integration. In essence, effective implementation of the BIAT initiative will be crucial to minimizing the challenges and maximizing the gains of tariff liberalization and ensuring that all African firms and countries are able to take advantage of the AfCFTA.

The signing of the AfCFTA could not have come at a better time when Kenya has identified four key priority sectors, “the Big Four Agenda”, to fast-track its development and realization of the Vision 2030. In particular, an integrated and liberalized African market provides a perfect opportunity for the country to elevate her manufacturing to contribute 15 per cent of GDP or even beyond by 2022. This is possible due to the potential of increased market access of Kenyan products to other African markets, for example in the central, west and north African regions, which have not been exploited before. In addition, Kenyan manufacturers would have the opportunity to source raw materials much more cheaply given the reduced tariffs and non-tariff barriers.

In conclusion, AfCFTA will provide a single economic space and facilitate in breaking the continent’s traditional pattern of shipping raw materials out and bringing in manufactured products. But most importantly, it will confer the much-needed structural transformation of the continent by facilitating achievement of economies of scale, specialization, access to cheaper inputs and, for consumers, more affordable products. Much more needs to be done to rally all African countries’ commitments towards realization of the dreams of the forefathers. But the steps taken by the African Union are in the right direction.

 

Kenneth Malot and Christopher H. Onyango, Trade and Foreign Policy Department

Photo: Courtesy of the African Union Commission

 

 

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