The African Continental Free Trade Agreement and its implications for Africa’s manufacturing sector
The African Continental Free Trade Agreement (AfCFTA) is the largest free trade agreement on the globe, with 55 partner countries it has a combined gross domestic product of USD$3.4 trillion. Trading under AfCFTA began on 1 January 2021 and it has provided member states with an opportunity to become competitive in the global market; which could have significant impacts on poverty reduction and economic growth. Africa’s manufacturing sector is anticipated to grow under AfCTFA, and it will see Africa exporters becoming increasingly integrated into global manufacturing supply chains. If AfCFTA is successful in its targets, it will increase annual output to $1trillion by 2025 and create over 14 million jobs in the process.
The implementation of AfCFTA brings about a reduction in trade costs by way of liberalisation of tariffs. The introduction to trade facilitation reforms reduces barriers to trade in terms of transporting goods and allows exporters to become increasingly more competitive in domestic and international markets. The liberalisation of tariffs is expected to increase real income by seven percent by 2035 across the continent, representing approximately US$445 billion. Negotiations are currently underway to eliminate tariffs on 90% of goods over a five year period with a further seven percent of tariffs on ‘sensitive’ goods to be eliminated over a 10 year period. Greater allowances have been made for Non-Least Developed Countries who are given 10 years and 13 years accordingly. This is likely to have little impact on government tariff revenue with imports from within Africa only making up a small percentage of tariff revenue for most countries. In the long term it is expected to have a positive effect on the continent with the volume of imports accounting for the overall tariff reduction. Further, AfCFTA will reduce trade costs associated with non tariff Barriers (NTB), such as administrative procedures and compliance requirements. The creation of a centralised set of rules will see standardisation across regulations and procedures and creating a streamlined trade structure. With the implantation of trade facilitation reforms such as this, businesses are able to expand internationally at a faster rate whilst focusing on production and competitive markets.
AfCFTA could increase countries’ ambition to become more self-sufficient, favouring an economic model which focuses on job creation and industrialization over exporting primary products. Research has suggested that the manufacturing sector is expected to double in size, with an export gain of 62% and intra-African trade increasing by 110% and by 46% to the rest of the world. This could see massive industrialisation for many countries within Africa, spurring on socio-economic transformation. AfCFTA looks to promote the increasing trend in Africa by supporting regional value chains. Currently the key export products include; construction materials, chemicals and machinery from Ghana, Mozambique, Nigeria, Uganda and Zambia; leather manufactures from Ethiopia, Nigeria and Uganda as well as textiles and clothing from Kenya and Ethiopia. The removal of both tariff and non tariff barriers will facilitate the souring of products from within the continent, creating a regional manufacturing clusters. This is dependent however, on trade agreements within the continent being more attractive than those outside the continent.
The African Union’s Agenda 2063 looks to embrace manufacturing opportunities, while several governments in Africa are working to introduce policies to improve the attractiveness of their manufacturing industries to investors. Foreign direct investment remains key in Africa’s manufacturing sector and countries such as Ghana are developing industrialization policies in support of their automotive industry. By creating regional manufacturing clusters, African countries will be able to attract foreign investment, which is of benefit to both parties. The challenge for Africa’s governments is to attract investment into the sectors which will benefit the most.
Written by Alexandra Otten