How The African Continental Free Trade Area Agreement Will Impact The African Economy

The African Continental Free Trade Area (AfCFTA) is an initiative that redefines the African economy by tapping into various aspects encompassing trade. AfCFTA was officially launched on 1st January 2021 and with the number of participating countries, this agreement is considered the largest free trade area. With this initiative, key struggles in African trade such as industrialisation, tariffs and global competitiveness will be properly addressed so African economy can find a strategic position and gain solid traction.  

Increasing Intra-African Trade 

African nations have been known to trade with countries outside the continent, making Intra-African trade only 16% of the total African trade. Compared to 68% in Europe and 59% in Asia, the figures for Intra-African trade call for a change in trading dynamics. This is one of the areas that AfCFTA tackles and will be executed by creating a single market composed of 1.3 billion people with an estimated combined GDP of $3.4 trillion.  

One of the problems that African businesses are facing is the presence of tariffs on goods. Tariffs put a strain on African trading, rendering the goal for cheaper goods a lofty endeavour. One of the objectives of AfCFTA is to reduce, if not completely remove tariffs on goods. The removal or reduction of tariffs allows African traders to do business with one another. With this one barrier removed, intra-African trade will increase by more than 50%. African businesses can enjoy AfCFTA's long-term effects such as faster movement of goods and services across borders and more investment opportunities.  

Reduction in Trade Tariffs 

Trade tariffs have been deemed as the bane of African businesses' existence. While solutions have been put forward to free businesses from the shackles of tariffs, those solutions were not able to break the barriers that caused African goods to be less competitive. Businesses aiming for economic growth, are deterred from scaling up due to these challenges.  

One of the significant effects of reducing tariffs is lowering the costs of goods, enhancing competitiveness and profitability of businesses. On the consumers' side, reduced tariffs mean cheaper goods and services. Affordable commodities will give consumers purchasing power, strengthening domestic consumption.  

Enhancement of Industrialisation 

Beyond trade in goods, AfCFTA also covers other essential aspects of African trade such as investment, services, competition policy, and intellectual property rights. AfCFTA also focuses on industrialisation across the continent. If there is a larger market for African businesses, it will be easier for participating countries to explore different stages of production, ensuring goods are valuable before they get exported.  

If a country, despite having abundant raw materials, has limited manufacturing capacity, AfCFTA enables this country to export materials to another country equipped with modern manufacturing facilities. This symbiotic relationship generates jobs, promotes industrial growth and accelerates technology and innovation.  

Competitiveness on the Global Stage 

For African countries, competing against their global counterparts is an ambitious goal because of issues with standards and regularisations. AfCFTA helps African businesses gain a competitive edge by simplifying the process of doing business across borders. For businesses to be more competitive, products need to be attractive to international buyers. The agreement ensures businesses can compete globally.  

African businesses shy away from Foreign Direct Investment (FDI) because of the unpredictability of the business environment. The agreement provides a more secure environment for businesses to increase FDI and be in a position where they can compete in international markets.  

Key Objectives of the AfCFTA 

1. Creating a Unified Customs Union

Trading across borders is not an easy feat for African businesses given the customs procedures. AfCFTA aims to unify customs union for businesses to save time and costs associated with trading. The significant reduction of these challenges will generate more investment and intra-African trade, promoting economic growth and development.  

2. Liberalising Intra-African Trade

AfCFTA provides a more cost-effective trading process by eliminating trade barriers that burden African businesses. The agreement encourages economic cooperation, increasing businesses' access to goods and services. Accessibility drives growth across these African countries. Trade liberalisation is a form of diversification of the African economic landscape by reducing over reliance on traditional export markets and increasing intra-African trade.  

3. Resolving Overlapping Regional Memberships

The multifaceted economic policies of many African countries are due to their association with various regional economic communities (RECs). Overlapping memberships and conflicting trade policies bring confusion to these African countries. Unifying these rules and policies require integration that the agreement aims to achieve. Harmonising trade rules makes trading environment more cohesive. Once overlaps are resolved, businesses facing administrative burden will also regain their momentum in trading across borders.  

4. Enhancing Economic Competitiveness

It is not easy to compete at a global scale when African businesses are deterred by tariffs and the lack of market access. The agreement enhances competitiveness by establishing a business-friendly environment where African countries are positioned more strongly in the global marketplace. African industries will reap many benefits from increased competitiveness, such as innovation and efficiency. Exposure to larger markets and greater competitions motivate businesses to improve their products and services. The agreement will incentivise these businesses for striving for higher quality goods and services.  

5. Facilitating Movement of Capital and People

A more integrated economic space ensures African economy remains competitive. Promoting competitiveness in African economy requires steady movement of capital and people. Facilitating movement of capital and people will generate more investment, support economic development, promote entrepreneurship and create more jobs. AfCFTA helps ease investment and labour mobility restrictions to allow businesses to gain access to resources needed for growth and expansion. When there are no limitations, the possibilities for economic development will also be limitless. Movement of capital benefits the economy while movement of people helps facilitate the exchange of skills and knowledge, encouraging innovation and enhancing productivity.  

A Gateway to Africa’s Economic Revival  

AfCFTA provides opportunities for African businesses to showcase their products and services to global markets. With this groundbreaking initiative, African countries are in a better position as trading process becomes more collaborative and strategic. Barriers like tariffs, overlapping memberships and economic restrictions will no longer become a cause for concern for African businesses because the agreement will put things in proper perspective so businesses can have access to fair and free trading.   

Strategic partnerships, streamlined logistics, and targeted market expansions are essential to stay competitive. POINTRADE helps anchors, suppliers, and funders become fully prepared by providing a comprehensive trade finance platform to stay ahead in a competitive market. Maximising the returns of AfCFTA starts with creating a stable business environment. Talk to POINTRADE to learn more about long-term strategies that can unlock the potential of your business, making the most out of AfCFTA.