African Continental Free Trade Agreement – Blessing or a Curse?

The recently signed African Continental Free Trade Agreement (ACFTA) has not reached the consciousness of many South Africans. Perhaps this is a result of ambivalence or a sense of cynicism around its implementation.

Whatever the case, one thing is crystal clear. The current populist tendency to xenophobia will need to be pro-actively countered to ensure that Trump Mini-Me’s don’t use openness as a vehicle for political gain.

On a continent that has started to pull itself up by its own bootstraps, this response is puzzling. Should South Africa not be excited about exporting tariff free across the continent? Is this not a ray of light in an otherwise dark economic picture?

Ebrahim Patel, DTI Minister, hailed the ACFTA as a potential gamechanger for Africa, heralding the realisation of a decade old dream of African Economic Unity.  But what is the reality?  Is Africa preparing strategically to change or are politicians saying one thing whilst creating more invisible barriers to trade?

In a world characterised by Brexit, Trumpanomics and the USA / China trade war, the idea of an open African market is appealing. Of the world’s 10 fastest-growing economies, five are African – Ethiopia, Rwanda, Ghana, Kenya, and Ivory Coast. Albeit from a low base, these could be the green shoots of economic revival we have been looking for. Free trade could be a catalyst for faster growth and should a rising tide not lift all ships?

The agreement to implement ACFTA was only reached in July, following Nigeria’s decision to join. It covers 54 of Africa’s 55 states and creates a market of 1.3 billion people, expected to grow to 2.5 billion by 2050.

If fully implemented, 90% of tariffs should be be eliminated in five years, with a delay to 10 years for least developed countries. But tariffs alone are not the only barriers.  ACFTA recognises this and commits countries to work to eliminate ‘invisible’, non-tariff trade barriers such as bureaucracy, lack of infrastructure, technical and conformity assessments as well as other hidden charges and taxes.

The IMF also sees ACFTA as a potential “game-changer” as intra-African trade accounts for only 18% of total African trade. In Europe, internal trade is 69% and in the Americas 59%. The UN Economic Commission for Africa estimates that ACFTA’s implementation could double intra-African trade by 2030.

Key to this are enabling infrastructure investments in roads, ports, electricity and digitisation. The potential to leverage ACFTA with Africa’s youth based demographic dividend (70% of population under 30)and rapid urbanisation makes the game changing possibilities obvious.

  • a single market contributing to economies of scale and cost / price reductions
  • economic diversification and industrialization, strengthened regional value chains and increased cross border investments
  • attraction of Foreign Direct Investment, with strong local content, to boost foreign exchange reserves
  • a positive potential impact on SA agriculture. SA  currently exports roughly 49% of its agricultural products in value terms – ACFTA could open up new markets

There is clearly a swings and roundabouts scenario. Whilst tax authorities will see lost revenue from decreased trade tariffs, it is likely benefits will exceed costs. Increased trade, production diversification, new jobs and greater industrialisation will lead to new sources of corporate income tax revenue, Value Added Tax and higher personal income tax revenue.

Against this optimism, Jeffrey Frieden of Harvard University reminds us there has been a decades-long backlash against global free trade. He believes the election of Trump, and his stated intention to roll back the new international economic order, is the most important consequence of this backlash.

America has been the leader of the international economic order since Bretton Woods in 1944. But, as America shifts, so other world leaders take their cue. The 1990s saw the pinnacle of ‘globalisation euphoria’ as the Iron Curtain fell and economic health reigned. The bubble burst in 2007, leading to the deepest global recession since the 1930’s. It is not just Republicans who are sceptical of free trade. Even Bernie Saunders and the Democrats have advocated protectionism.

The economic roots of the backlash are clear. Americans have associated globalisation with increased income inequality – as the financial and corporate elite benefitted greatly whilst the middle class saw lower wages and was left behind.

It is important in our euphoria about ACFTA, to take into account the inequality lessons underpinning the backlash. In Africa, increased inequality could well be between countries and regions as much as different sectors of society.

Are there ways of broadening the positive impact and compensating those who will be worse off as a result of open markets? Policy needs to be translated into concreate action, the free movement of people and the right to work in other countries needs to become a reality and invisible barriers need to be positively addressed.