AfCFTA: Africa is moving too slowly towards economic integration

Blog Trade and Firms

Africa’s quest for a single market dates back to the establishment of the Organisation of African Union (OAU) in 1963. The OAU, which brought together Africa’s newly independent nations, had at its heart intra-Africa economic integration. In fact, it aimed to emulate Europe by creating an African Economic Community, encompassing a single market and a customs union. In 1980, the OAU adopted the Lagos Plan of Action for Economic Development of Africa through the formation of an African common market. Subsequently in 1991, African heads of state signed the Abuja Treaty establishing the African Economic Community (AEC), with an ambitious six-stage roadmap to full economic integration, including the establishment of a customs union, a single market and an economic and monetary union.

However, while Europe moved rapidly, following the Treaty of Rome, establishing the European Economic Community in 1957, and creating the world’s largest customs union in 1968 and the world’s largest single market by 1992, African leaders made virtually no progress towards achieving their vision of economic integration. In 2002, the African Union (AU) was established, replacing the OAU, to give institutional and political momentum to the integration agenda. However, while the AU institutionally mimicked the EU, it did not accelerate the pace of Africa’s economic integration.

High trade costs drive low intra-Africa trade

Consequently, while Europe is the world’s most economically integrated continent, Africa is the least. Over 80% of African trade is with the rest of the world, while intra-Africa trade accounts for just over 10% of its total trade, compared with nearly 70% in Europe, 54% in North America, 51% in Asia and 15% in Latin America. Although the Lagos Plan of Action led to the creation of several Regional Economic Communities (RECs), such as ECOWAS in West Africa, COMESA in East Africa and SADC in Southern Africa, there is very shallow integration within virtually all the RECs (see table below) and hardly any harmonisation between them.

Current state of integration in the RECs

Source: AU-ECA-AfDB (2016, 2017) “Assessing Regional Integration in Africa VIII”

Given the lack of integration, Africa remains a fragmented continent, with very high trade costs. High tariff barriers (average of 8.7%) and, more perniciously, non-tariff barriers, such as cumbersome customs procedures (“thick” borders) and excessive regulations, make doing business across Africa extremely difficult. This accounts for the low intra-Africa trade, pushing trade in Africa into predominantly informal channels and denying the continent the investments and scale economies it needs to industrialise, diversify its export base and develop regional value chains as a critical step to participating in global value chains. The solution, clearly, is economic integration that would engender tariff liberalisation, trade facilitation, and trade policy coherence across the continent. As the African Development Bank (AfDB) once tweeted: “Regional integration is a development priority for Africa”.

AfCFTA as a significant step toward deeper integration

This was the rationale behind the creation of the African Continental Free Trade Area (AfCFTA). In 2011, the AU Assembly adopted the Action Plan for Boosting Intra-Africa Trade (BIAT), and at the AU Summit held in Addis Ababa in January 2012, African Heads of State adopted a decision to establish a Continental Free Trade Area. Under the Abuja Treaty of 1991, Africa should this year, 2019, create a Continental Customs Union and by 2023 establish a Continental Common Market. But those ambitions have been significantly slimmed down as the AfCFTA is only a free trade area, inferior to either a single market or a customs union. That said, the AfCFTA’s objectives are, inter alia, to “create a single market” and to “lay the foundations for the establishment of a Continental Customs Union”.

After two years of intense negotiations, the AfCFTA was launched in Kigali, Rwanda, on 21 March 2018, with 44 out of Africa’s 55 countries signing the agreement establishing the free trade area. The agreement, with a 253-page long consolidated text, covers trade in goods, trade in services, and dispute settlement procedures, as well as related issues, such as rules of origin, customs and trade facilitation, non-tariff barriers, and trade remedies. All of these are under Phase 1 of the agreement. The Phase 2 negotiations, scheduled to be concluded in January 2020, will cover competition, investment, and intellectual property rights.

Benefits and obstacles to a successful AfCFTA

Several studies have shown that, if successful, the AfCFTA would bring significant economic benefits to Africa. For instance, an UNCTAD report shows that the AfCFTA would add $17.6 billion (2.8%) to Africa’s overall trade with the rest of the world, stimulating exports by $25.4 billion (or 4%). The agreement would also increase intra-Africa trade by $34.6 billion (52%), with a further $85 billion if trade facilitation, rather than just tariff liberalisation, was addressed. Indeed, a study by Afreximbank went as far as saying that the volume of intra-Africa trade could amount to $400 billion if the AfCFTA led to market information being shared and widely available among African countries. What’s more, a successful AfCFTA would help integrate Africa’s significant informal trade into the formal sector and drive the development of regional value chains. All of these are without other potential advantages, such as Africa being a greater pull for foreign direct investment and having a significant bargaining power by leveraging a population of 1.2 billion and a combined GDP of $3.4 trillion.

Yet, there are several obstacles to the AfCFTA’s success. The first is the lack of political will. For instance, although the AfCFTA agreement has now been signed by 49, including South Africa, securing the number of ratifications needed to bring it into effect has been very slow. To enter into force, there must be 22 ratifications. Although the agreement was supposed to enter into force in January so far only 18 ratifications have been secured. Given the slow ratification process in many African countries, securing the remaining ratifications could run into the first half of this year. Meanwhile, Nigeria, Africa’s largest economy, has not signed the agreement, citing domestic  .

But the disjointed response to the AfCFTA simply reflects the differing visions of free trade and economic liberalisation in Africa. The most enthusiastic about the AfCFTA are the liberalising and reformist countries in Africa, such as Ethiopia, Rwanda and Ghana, which are also the continent’s fastest growing economies, while the less enthusiastic are the protectionist and hesitant reformers, such as Nigeria. Indeed, although the AfCFTA is expected to remove tariff barriers on up to 90% of goods traded between African countries, the agreement is full of carve-outs for sensitive products, priority products, exclusion lists, etc. The reluctance to liberalise is thus a major obstacle to the success of the AfCFTA. But, apart from that, the AfCFTA is likely to be hindered by implementation challenges due to institutional and capacity deficits. The implementation capability traps in Africa are significant.

Concluding remarks: Africa needs to make the AfCFTA work

The AfCFTA is potentially a game-changer. It could trigger far-reaching domestic policy and institutional reforms and become a credible forerunner of a single market and a customs union for Africa. So far, however, there is little evidence of the political will to make that happen. Africa’s economic future certainly lies in a single market and deeper integration into the world economy. But it all starts with making the AfCFTA work.

Dr Olu Fasan, a trade lawyer, is a Visiting Fellow and member of the International Trade Policy Unit at the London School of Economics