Understanding the African Continental Free Trade Area -AfCFTA (for Dummies Version)

[Want to get automatic updates on ethel cofie’s blog post of Africa, technology, ecosystems and doing business in Africa sign up here ]

You probably already know about the African Continental Free Trade Area (AfCFTA); a free trade effort led by the African Union, that came into effect on 1^st January 2020, which has in turn, created the trade agreement with a largest number of countries  in the world . You have also probably heard it connects 1.3 billion people in 55 countries and brings wealth to all. If you are not a policy wonk, you probably know in theory it’s a good thing but you’re not entirely sure why and how it applies to your life.

This blog post is here  to break down [without the use of too many jargons]

• What AfCFTA is?
• What change is it going to bring?
• What does it mean to you as an individual or as someone with business interest in Africa?

First of all what is a free trade area?

A free trade area is a group of countries, who have mutually agreed to limit or eliminate trade barriers with each other. The group of nations involved in the free trade area [ in the case all the 34 countries in the African Union that have ratified the agreement ] will have to establish the rules to govern the customs procedures  to be followed by each country , what the tariffs on goods will be, how trade conflicts will be resolved ,how intellectual property will be protected in each country and if there will be quotas on goods that move across countries.

Phase I of negotiations for AfCFTA covered trade in goods, trade in services and dispute settlement. Phase II is to cover investment, competition policy and intellectual property rights.

 All African Union members but one, Eritrea, have signed the deal, and 34 out of 54 signatories have ratified the agreement.

Why is it necessary or useful?

Africa does very little trade with itself as opposed to trade with the West and East.In 2017, intra- African exports were 16.6% as opposed to 68% in Europe and 59% in Asia . This is an attempt by the African Union to make it easier and cheaper for African countries to trade with each other and strengthen regional integration.

The lower the tariff barriers and customs costs, the cheaper goods become for export across the continent.

The AfCFTA Plan is to eliminate tariffs on 90% of intra- Africa trade, to enable movement of investment and people across the countries as well as create a customs union.

A custom union is where a country creates set a common customs tariffs, to be applied across the participating region. This also requires all parties to establish identical external tariffs with countries that are not signatories to the agreement. The most famous customs union is in the EU.

All this will cut out bureaucracy and create opportunities for export and doing business with each other, for the growth of businesses across the continent.

What are the pitfalls of free trade and AfCFTA?

Liberalizing trade always has winners and losers and from research, it tends to adversely affect the poorest of the poor disproportionately.

The economic inequalities across African countries means  that, larger countries can dominate and destroy industries in smaller markets e.g. a bigger South African retail outlet is more likely to provide cheaper goods to consumers in the Gambian market  and hence lead to the downfall of said smaller outlet.

AfCFTA has a number of hurdles it needs to clear before it can truly be successful and that includes issues with:

• Lack of modern and efficient infrastructure
• Unclear information about processes
• Recent economic downturns because of Covid 19 and its fall out

 

Ongoing Projects within AfCFTA Agenda

Payment Processing

AFTCA and the African Union is collaborating with the African Export-Import Bank (Afreximbank) on a pan-African payments and settlement platform, for which the bank will provide US$500 million.

The Pan African Payment and Settlement System (PAPSS), is the first centralized payment market infrastructure for processing, clearing and settling of intra-African trade and commerce payments.

It will make it possible for African companies to clear and settle intra-African trade transactions in their local currencies. This will significantly reduce the dependence on a third currency(usually the USD) in regional trade payments.

Online Tool for Reporting Trade Barriers

The African Continental Free Trade Area (AfCFTA)’s Non-Tariff Barriers online reporting, monitoring and eliminating mechanism is a facility developed to enhance trade through removal of non-tariff barriers to trade (NTBs).

At https://tradebarriers.africa, you can report any obstacle encountered when trading goods across intra-African borders, for example excessive delays, ad hoc fees at the border, cumbersome document requirements, restrictive product standards and regulations etc.

 

 

Question for the African Tech ecosystem as AfCFTA comes in to full force

• What does that means for the travelling of technical skill and cost of technical skills on the continent?
• How will AfCFTA effectively enable ease of regulatory barriers for heavily regulated industries like Fintech intra continent?
• Can AfCFTA help fix the issues with intellectual property theft in wholistic way, where though a good number of  African countries have IP laws  but fail to properly enforce them ?
• How does AfCFTA become a catalyst for intra African ecommerce growth without creating itself own private marketspace thereby directly competing with private sector ?