Q&A: What's next for Africa's continent-wide free trade agreement?

ABIDJAN — One month after 44 African nations signed on to the African Continental Free Trade Area — an agreement that could create the world’s largest duty-free trade market — efforts toward implementation are gathering steam.

Observers say that consolidating the continent into one trade area would provide vast opportunities to expand regional integration, encourage industrialization and diversification, and widen trade possibilities for businesses and consumers, but the agreement still needs to be ratified at the national level by those countries that have signed on.

If adopted by all 55 member countries of the African Union, AfCFTA would cover more than 1.2 billion people and upward of $2.5 trillion in combined gross domestic product. Coupled with a ballooning middle class, growing consumption demands in Africa could shape the trajectory of its countries’ industrial diversification efforts and economic growth.

Currently, manufactured goods make up 42 percent of intra-African trade, Albert Muchanga, African Union Commissioner for Trade and Industry, told Devex. But within the vast new trade area, “large-scale production of manufactured goods is going to increase and therefore we will see a huge drive towards industrialization,” he predicted.

Muchanga said the primary beneficiaries of AfCFTA will run from national governments and the private sector to informal business owners and farmers. “We also expect to see a huge move toward agroprocessing because one of the key elements of consumption is food, and right now, Africa is a net importer of food from the rest of the world,” he explained.

African businesses trading within the continent currently face tariffs averaging 6.1 percent, according to the African Union, a key reason why intracontinental trade remains low.

AfCFTA will progressively eliminate tariffs on intra-African trade. It also includes guiding principles to increase market access for domestic service suppliers, and provisions regarding transit facilitation and customs cooperation. It could boost local trade by 52 percent, the United Nations Economic Commission for Africa estimates.

Devex sat down with Muchanga to talk about the current state of play and the challenges that lie ahead in implementing such a large free trade agreement. The conversation has been edited for length and clarity.

With 44 countries signing the monumental AfCFTA agreement, let’s discuss the next steps toward implementation.  

Under the agreement, we need a minimum of 22 ratifications [for AfCFTA to come into effect.] The process of ratification means that a country has domesticated the legal provisions, so they become part of national law. The agreement will come into force a month after those 22 instruments of ratification are posted to the African Union.

After that, the state parties will decide when to meet, so they can begin looking at issues of how to establish the secretariat, how to provide a budget, and to come up with an initial program of work. We are also working to ensure that all 55 members states of the African Union are signed on. We are in discussions with them and quite a number of assurances have been given that they should be able to sign on as soon as they finish their national level consultations.

After that, we go to the next stage, which is to bring the agreement into operation. That means we agree on rules of origin and we undertake the tariff liberalization efforts, so that we give substance to the agreement. Then we can begin to facilitate trade.

In anticipation of a good outcome, we are also working with the African Export-Import Bank to come up with a pan-African payment system to “de-risk” transactions across the continent.

There are a number of activities going on and we are very happy with the pace as we are seeing very good progress.

Media reports from places such as Rwanda and Ghana indicate that certain governments have already ratified the pact at the national level. Can you discuss where we are in the ratification process?

Right now, a few countries such as Rwanda have begun the process. We have unverified media information that Kenya and Ghana have also ratified. But none of them have officially submitted the instrument of ratification [to the African Union.] We start counting when we have received this instrument.

For now, the process has started … We are very hopeful that within the next nine to 12 months, we should receive the minimum number of ratifications from 22 countries.

Which African industries do you see benefiting most from AfCFTA?

With the establishment of AfCFTA, we are going to see private consumption and business-to-business transactions rising. That means the first beneficiary will be the manufacturing industry. There’s going to be enhanced demand for manufactured goods.

Right now, 42 percent of intra-African trade is made up of manufactured goods. Within this large market, large-scale production of manufactured goods is going to increase and therefore we will see a huge drive toward industrialization.

Related to that, we also see a huge move toward agroprocessing because one of the key elements of consumption is food. Right now, Africa is a net importer of food from the rest of the world. But with agroprocessing, we will see a time when we reduce net imports, and eventually become a net food exporter. Agroprocessing, industrialization, and manufacturing, in general, are going to pick up as a result of AfCFTA.

We’ve come up with two accompanying instruments. One is the Single Africa Air Transport Market that was adopted by member states and heads of government in January. This is going to promote more efficient and cost-effective travel by Africans across the continent. And we also have an agreement on the free movement of people and the right of residents and right of establishment. So we are building an attractive market for both African investors and investors from the rest of the world.

What could the impact be for those countries that have not yet signed on to AfCFTA, including Africa’s largest economy, Nigeria?

All 55 member states of the African Union have been involved in the negotiations since 2015. Some of them, due to constitutional provisions, still needed to go back to their parliaments and other structures before they can sign on. Others wanted to reach out to the broader stakeholders: Private sector, academia, civil society, among others, so they are still involved in national level consultations.

None of them have said that they are never going to sign it. None. They are coming on board, but we just need to give them time to finalize their national, domestic processes. In July, we are going to have our second [AU] summit of the year. We are hoping that at that time a number of them will be ready to sign.

We have acknowledged the vast opportunities of this agreement, but what do you see as possible challenges?

Of course there will be challenges at the individual, institutional, and national level. The first challenge is for us to ensure that the market is interconnected and that the infrastructure across Africa allows goods to move very efficiently and cost-effectively. The next challenge is that we agree on the tariff liberalization and the rules of origin so that we can start trading physically.

There’s also the challenge of cynicism. Some of our cooperating partners don’t think that Africa has done the right thing. We see this as part of a psychological war. We believe that, as a continent, we have done the right thing. When you look at Africa, we have small, isolated, and fragmented markets. This large market will not be created in one day; it’s a journey and we are just beginning. We are going to move rigorously in that direction, working toward fulfilling our ambitions.

There are also some challenges of revenue losses. Some countries may experience immediate revenue losses as a result of tariff reductions. But in the long term, especially if we promote production and industrialization where we have alternative tax bases, the revenue losses will be minimized over time.