The debate on the benefits of trade has dominated this decade, and Africa has cast its vote for more and better trade with itself. In March 2018, African countries signed a landmark trade agreement, the African Continental Free Trade Area Agreement (AfCFTA), which commits countries to remove tariffs on 90 percent of goods, progressively liberalize trade in services, and address a host of other non-tariff barrier.
If successfully implemented, the agreement will create a single African market of over a billion consumers with a total GDP of over $3 trillion. This will make Africa the largest free trade area in the world. What is less known about the AfCFTA is that its scope exceeds that of a traditional free trade area, which generally focus on trade in goods, to include trade in services, investment, intellectual property rights and competition policy, and possibly e-commerce.
The AfCFTA is complemented by other continental initiatives, including the Protocol on Free Movement of Persons, Right to Residence and Right to Establishment, and the Single African Air Transport Market (SAATM). The scale of AfCFTA’s potential impact makes it vital to understand the main drivers of the agreement and the best methods to harness its opportunities and overcome its risks and challenges.The signing of the AfCFTA in Kigali comes at a time when the benefits of trade are actively contested, and global powers that traditionally promoted trade as a crucial driver of growth are now calling into question its very tenets.
This apprehension is not without cause. It is broadly recognized that, while globalization and trade produced the impressive economic expansion of the past three decades, the gains have not been fairly distributed. The World Bank population-weighted Gini index shows that inequality rose steeply between 1988 and 1998 and declined only moderately by 2013. Although global poverty has fallen, prosperity has not been fully shared.Can Africa do better with trade? The share of intra-African exports as a percentage of total African exports has increased from about 10 percent in 1995 to around 17 percent in 2017, but it remains low compared to levels in Europe (69 percent), Asia (59 percent), and North America (31 percent). This is an important reason to expect that trade will be a key driver of growth in Africa.
According to modeling results by the Economic Commission for Africa (ECA),1 the AfCFTA is projected to increase the value of intra-African exports. AfCFTA will be a game changer for stimulating intra-African trade. It is projected, through the sole removal of tariffs on goods, to increase the value of intra-African trade by between 15 percent (or $50 billion) and 25 percent (or $70 billion), depending on liberalization efforts, in 2040, compared to a situation with no AfCFTA in place.
Alternatively, the share of intra-African trade would increase by nearly 40 percent to over 50 percent, depending on the ambition of the liberalization, between the start of the implementation of the reform (2020) and 2040.2Recent evidence by ECA shows that when African countries trade with themselves they exchange more manufactured and processed goods, have more knowledge transfer, and create more value. In fact, manufactured goods make up a much higher proportion of regional exports than those leaving the continent—41.9 compared to 14.8 percent in 2014. The real test of the AfCFTA, however, will be how quickly African countries can accelerate export diversification and product sophistication and make trade more inclusive.BLS18234_BRO_book_006.1_CH6
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