Is the AfCFTA Being Taken Seriously?

             On May 30, 2019, the framework agreement establishing the African Continental Free Trade Area (AfCFTA) entered into force, but this continental body still hasn’t become fully operational, as nations at different levels of development and economic vibrancy continue to negotiate on critical commitments, including tariff liberalization schedules and services. Once fully realized, the AfCFTA would cover 54 countries (the largest of any regional trade bloc), creating a market encompassing 1.2 billion people with a combined economic output in excess of $2.5 trillion.  The World Bank estimates that the AfCFTA could lift more than 30 million Africans out of extreme poverty (defined as having an income of less than $1.90 per day), and 68 million more people out of moderate poverty (an income of $5.50 per day), within 13 years.  Nevertheless, there continue to be skeptics.

The closure of borders and shutdown of economies under COVID is partially responsible for the delay in implementation of AfCFTA, but it was always envisioned as a work in progress because all signatory nations aren’t able to liberalize as quickly as others.  Moreover, under colonial rule, normal economic functions were skewed, forcing African stakeholders to adapt to such a convoluted situation.  Consequently, when asked to abide by accepted international trade rules, many were reluctant to do so because they’d learned to make money the so-called “wrong” way, and it’s difficult to give up practices that work for you even if someone explains that much of the rest of the world succeeds in doing things differently.  This likely accounted for the reluctance of nations such as Nigeria to adopt quick ratification of the AfCFTA agreement.

An Africa-wide trade liberalization plan dates back to the 1960s when the Organization of African Unity (OAU) was established.   The OAU was intended to foster economic cooperation among its members, and efforts by the OAU and its successor, the AU, created in 2002, have primarily aimed to use Africa’s eight regional economic communities (RECs) as the building blocks for eventual pan-African integration – a United States of Africa. Initial plans envisioned transforming the RECs into customs unions, providing free trade among members and a common external tariff rate before merging them into a continental trading bloc. These plans eventually became untenable given the RECs variable performance and their increasingly overlapping membership. The AfCFTA approach is seen as more flexible, allowing for an agreement that includes commitments between both RECs and individual states.

However, there are numerous obstacles on the way to African continental integration.  Not only are there different legal and economic systems in place, there are different languages, which may seem minor but often lead to misunderstandings that can have serious implications.  Ask anyone who’s negotiated an agreement in more than one language. Then there are the outside influences to take into account.  The British Commonwealth and La Francophonie exert varying levels of influence and create requirements that do not favor a singular continental union.  This is a major reason why intra-Africa trade has lagged over the years.

In 2018, 16% of Africa’s total exports were intra-regional, which was considerably below that of most global regions, including North America (30%), Asia (60%), and Europe (69%). Intra-African trade rose from 7% to 16% of total African trade from 1990 to 2018. During this period, intra-African trade generally included more value-added content than African trade with the rest of the world.  Manufactured goods accounted for 40% of intra-regional trade from 2007-2017, while exports to the world consisted largely of raw ore and energy commodities with manufactured goods accounting for 16%. Growth in intra-regional trade, however, occurred primarily within RECs, and such progress was not uniform; 75% of intra-African trade occurred in just five of eight RECs.  Long-term trends in Africa, however, suggested such trade would increase, but it is today estimated at 15% - largely but not exclusively due to the COVID shutdowns.

There are technical difficulties as well.  Solving cross-border payments within the continent, for example, could “exponentially increase intra-Africa trade,” according to a joint report by the United Nations Development Programme and the AfCFTA secretariat entitled Making the AfCFTA Work for Women and Youth. A typical cross border payment is a multi-player process that begins when a purchase transaction is initiated, and the merchant’s bank requests payment from the buyer’s bank. Then, the money is transferred from the buyer’s bank to its correspondence bank in the merchant’s country for final settlement into the merchant’s bank.  Cross border payments also are facilitated via different payment methods such as credit cards, cross border payment gateways, wire transfers and e-wallets, among other methods. How AfCFTA protocols facilitate cross-border payments will go a long way toward making this program the success it should be.

Non-tariff barriers such as quotas, import restrictions, and expensive export and import licenses, are among hurdles that, if not effectively addressed will continue to limit growth across the continent.  It is several times more expensive to transport goods just 1,700 km from Douala in Cameroon to N’Djamena in Chad than it is to ship those same goods 12,000 km away to Shanghai, China. Some of these high costs, of course, can be attributed to poor infrastructure, but non-tariff barriers also play a large role in making trade between African states more expensive, and therefore, less likely. While implementation of the AfCFTA will reduce 90% of tariffs between African states and make trade far cheaper, failing to address these issues adequately will continue to make trade unnecessarily costly.

There are hopeful developments, though.  The Africa Trade Exchange (ATEX), a business-to-business (B2B) e-commerce platform, was launched during the official opening of the 54^th Conference of African Ministers of Finance, Planning, and Economic Development in Dakar, Senegal, last month. The platform was developed by the Economic Commission for Africa (ECA) and the African Export-Import Bank (Afreximbank), in collaboration with the African Union and the AfCFTA Secretariat to serve as a B2B and business-to-government (B2G) digital marketplace. According to ECA, ATEX is expected to enable pooled procurement of basic commodities to ensure countries have access to scarce supplies in a transparent manner. 

Such a platform will benefit from the financing for trade deals that already exists, but which have not always been as accessible as needed.  Some development finance institutions are working on efforts to inform potential business beneficiaries of their offerings, such as the U.S. International Development Finance Corporation and Afreximbank.  This is a long-awaited process that must succeed if intra-Africa and Africa international trade can work to its fullest extent.  For example, even after more than 20 years in force, many African and American businesspeople still don’t fully understand how the African Growth and Opportunity Act process works, and there certainly isn’t universal understanding of the newer Prosper Africa initiative either in Africa and even in the United States.

This is exemplified in a new initiative just announced by the U.S. Chamber of Commerce, which announced this month at the US-Ghana Business Forum that consultations are ongoing for the establishment of platforms for American investors on the continent to examine protocols under AfCFTA.  That is the traditional American way of determining whether investment is warranted.  Prosper Africa introduced the opposite way of achieving the commercial environment desired.  Under that initiative, companies promote required reforms in regulations by offering investments under conditions that make those investments more likely to be successful.

For decades, the U.S. has urged African governments to make certain economic and regulatory reforms in order to gain investment.  However, despite the correctness of any such advice offered, policies often are tied to politics and also are laden with justifiable self-interest, which makes recommendations suspect in the eyes of those being solicited.  The Prosper Africa approach is akin to shopping and seeing the price for a desired item through the store window.  You see what you want, and you see what it will cost you.  That makes it easier to make your decision on a cost-benefit analysis in real terms and not based on someone else’s conjecture.

            For the sake of increasing U.S. investment in Africa, I hope the companies using the chamber’s platform not only understand the complexities involved in fully implementing AfCFTA, but take into account real business offers and how they affect African government decisions.  The AfCFTA is an African Union institution, which itself is managed through the member governments.  Business in Africa will be conducted by firms in those countries, regulated by their governments of course, but influenced by concrete gains to be made if certain reforms are implemented.  Convince the businesses who will help convince the governments who can then convince the AfCFTA or any other body of the wisdom of changes recommended.  Lasting change starts at the bottom and works its way up the chain of authority.