The challenge of how to make Africa’s free trade agreement work

The launch in May of the African Continental Free Trade Agreement (AfCFTA) created a single market of 1.3-billion people that will grow to an estimated 2.5-billion by 2050.

This is a market where 60% of the population is under 25 and where there is an appetite for high consumption of fastmoving consumer goods.

The challenge is: how do we make it work?

The AfCFTA has been signed by 54 of the 55 countries in Africa (only Eritrea has not signed) and ratified by more than half of the signatories. It creates a real opportunity for Africa to liberalise more than 90% of intra-Africa tariffs and deliver growth on the continent.

Successful implementation of the agreement has the potential to establish Africa as a global manufacturing centre and could, ultimately, result in an estimated 80-million jobs in Asia being transferred to Africa.

CEOs of African businesses have their fingers crossed that this is, finally, tangible progress towards a homogeneous single market. But they remain sceptical that such an ambitious agreement can be successfully implemented, given the limited success of African regional free trade initiatives before.

The first step to a successful AfCFTA was a high level of participation that, against all the odds, has been achieved. The second step, due to be taken in July 2020, is the implementation and practical adoption of the trade practices, processes and infrastructure required to establish a working free zone across 54 countries.

A precedent for such a Herculean task exists: the Asean free trade zone has been a notable success, creating a platform for manufacturing, regional trade and a stimulus for jobs and prosperity in Asia.

By 2040, Africa will have a larger working population than China and India combined.

Much of the momentum has been driven by the AU and the continent’s development finance institutions, which have ushered the process forward, often having to use all the leverage and persuasion they have available. Encouragingly, they are now fully committed to implementation; resourcing and supporting a launch; and delivering achievable steps by July 2020. The agreement will take until 2030 to be fully operational.

President Cyril Ramaphosa takes on the presidency of the AU in 2020 and understands the benefits of the AfCFTA and the need to drive the process forward. There is concern, however, that he will be preoccupied with the domestic issues boiling in SA. It remains to be seen how important the AfCFTA is on his agenda and how much time he can allocate to advancing the process.

Africa has the lowest intraregional trade in the world. Only 15% of African trade crosses the border between neighbouring countries, whereas cross-border trade represents about 65% of the trade in developed markets. The free movement of goods has the potential to trigger a manufacturing boom and establish Africa as a world centre for manufacturing.

Asia’s transformation into a global economic engine began with the production of cheap goods in countries where wages were low and workers abundant. What followed was the development of sophisticated regional value chains, knowledge transfer and upskilling, and the transition from export-led economies to more balanced ones with rising domestic consumption.

Africa has yet to experience anything like that. The lack of cross-border trade today stifles manufacturing across the continent, constraining production to local markets that are difficult to scale. The elimination of tariffs will stimulate trade, enabling companies to expand and develop as they tackle larger regional markets.

The manufacturing sector will also begin to draw foreign direct investment. This, in turn, will lead to larger production volumes and bring about new efficiencies, enabling African manufacturing to finally have the ability to compete not only in domestic and regional markets but to be more competitive with global manufacturing.

By 2040, Africa will have a larger working population than China and India combined. Low wages on the continent are attracting manufacturers from high-employment industries, such as apparel, which can manufacture at a lower cost in Africa than in traditional Asian production centres. The current slowdown in developed markets means that increasing numbers of multinational companies are becoming interested in the African opportunity as a market and as a global manufacturing base.

For Africa, successful implementation of the AfCFTA is a game changer with the potential to move millions from a rural subsistence agriculturebased society to an early stage industrial society. Manufacturing wages are five times more productive for GDP growth than agriculture.

Many of the criteria needed for Africa to prosper finally appear to be aligning. These include a competitive young workforce that is willing and able to adopt new technology and embrace the fourth industrial revolution, combined with increasing political stability across the continent and vast, untapped energy resource discoveries that are attracting billions of dollars of foreign investment.

The latter is generating dividend payments for governments in countries such as Mozambique, Tanzania, Senegal, Ivory Coast, Ghana and Mauritania that are sufficient for them to develop as they become net energy exporters. The AfCFTA has the potential to bind all these prospects together and deliver real growth.

China is first out of the blocks. It is interacting with the private and public sectors in Africa to realise the benefits expected from the AfCFTA. Already at the forefront of infrastructure projects in Africa, Chinese manufacturing initiatives are spreading.

Chinese companies are relocating their manufacturing hubs from China to Africa in the expectation of tariff-free regional trade and competitive export markets. The alignment of Africa with the Chinese Belt and Road Initiative is at the forefront of Sino-African intergovernmental discussions.

If Africa can implement the agreements in practice, and other countries and trading blocs follow China’s lead, the AfCFTA has a good chance of living up to its promise, propelling Africa to the forefront of global manufacturing.

PRESIDENT CYRIL RAMAPHOSA TAKES ON THE AU PRESIDENCY IN 2020 AND UNDERSTANDS THE BENEFITS OF THE AFCFTA AND THE NEED TO DRIVE THE PROCESS FORWARD