7 February 2019

Africa: Debate - Nigeria Isn't Buying Into Africa's Free-Trade Area - but Should

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In March 2018, 44 African countries took perhaps the most significant step yet to advance a vision for greater intra-African trade by signing the Framework Agreement on the African Continental Free Trade Area (AfCFTA). By January 2019, that number had grown to 49 out of the 55 AU member states, of which 16 had completed steps to ratify the agreement. The ambitious project seeks to remove tariffs on 90% of the goods traded between the signatories to the agreement, and gradually eliminate other non-tariff barriers to trade in goods and services.

Beyond the initial hype surrounding the Kigali summit of 2018, Africa has not been immune to the debates around the economics of free trade that has come to define the 2010s. In Abuja, Nigeria's capital, policymakers and lobbyists worry about the collapse of tenuous local industries and of losing economic clout in the region. Nigeria is Africa's largest economy, making it the most notable non-signatory to the AfCFTA deal. The president of Nigeria's largest labour union - which has successfully lobbied against Nigeria's participation in AfCFTA - has described the AfCFTA as "an extremely dangerous and radioactive neo-liberal policy initiative... that seeks to open our seaports, airports and other businesses to unbridled foreign interference never before witnessed in the history of the country". Yet, Nigeria currently has the largest concentration of people living in extreme poverty in the world, with the worst hit group being children and teens under the age of 15. Even worse, this number is growing. Something has to give.

As always, this is a story of untapped potential. Trade between the 55 African Union member states is about 18% of total exports from the continent, compared to 69% in Europe, 59% in Asia and 31% in North America. This is particularly important when considering that manufactured goods make up a much greater proportion of intra-Africa trade than trade with the rest of the world which is mainly focused on raw materials. Despite this, and the fact that Africa is the second most populous continent, Nigeria's main trade partners are all from Europe, Asia and the Americas.

To be clear, and in contradiction to concerns about loss of sovereign power, the AfCFTA as currently proposed is about economics, not politics. Not only is the AfCFTA is a basic trade agreement - it is neither a customs union nor a single market - but also, Nigeria is a regional military and political power and so has no foreign interference resulting from AfCFTA to fear. Furthermore, free trade agreements have numerous precedents all over the world, none of which has been directly implicated in the sort of collapse in sovereignty being alluded to. It is in fact undeniable that Lagos State, Nigeria's most economically successful region, owes its rise to its historical status as Nigeria's premier trading seaport. Lagos' economy has continued to grow consistently since the 1880s and today employs more people than ever.

Boosting manufacturing, innovation and prosperity

As Nigeria's government continues its consultation, it is important to note some of the potential benefits of the AfCFTA.

Nigeria's isolationism makes it difficult for local businesses to scale abroad and thus makes them less attractive for foreign direct investment. By giving businesses access to a larger market beyond their home countries, the trade agreement would allow the establishment of industries in Africa that are simply not profitable now, foster the scaling of industries and lead to the development of entirely new industries to take advantage of the growth in inter-African relations.

With its rapidly growing population of almost 200 million occupying a territory almost twice the size of France, Nigeria simply has more workers and consumers than anywhere else in Africa. For many businesses, there is no other place in Africa that can offer such scale. This will provide a competitive advantage to Nigeria in firm considerations of where to cite facilities and do business.

Liberalising trade facilitates the sort of knowledge sharing that is crucial for innovation. Multinational firms often have greater expertise than local firms, gained from operating in several countries over long periods. These firms, attracted by the AfCFTA will expose local firms to their best practices and technologies often through partnerships and sometimes through competition. This sort of exposure will challenge entrepreneurs in the country and give them greater access to the skills and partnerships they need to be dynamic in today's world.

Sheltering firms from foreign competition removes the incentives for these firms to be more competitive and consequently produce better products for consumers at cheaper prices. It also leads to market distortions. For instance, supermarket shelves in Africa's biggest cities are populated with toothpicks, toilet paper, rice, and chocolate imported from Europe and Asia when these goods can otherwise be sourced cheaply from Nigeria or other neighbouring markets in the absence of tariffs. These manufactured products are sold at a premium and because their production process is not restricted to extraction alone, they are more labour-intensive and consequently create more jobs. These jobs are lost because it is often easier to trade with other continents than it is to carry out intra-Africa trade.

There is also the case to be made for entrepreneurship in Nigeria. About 40% of Nigerians aged 18-64 are entrepreneurs, almost three times the global average. As evidenced in Alaba International Market, perhaps the biggest new venture incubator in the world, most of these entrepreneurs work in retail. The AfCFTA would give them more options for sourcing and consequently drive their costs down. Non-retail entrepreneurs would also benefit from the ability to build more sophisticated value chains for improved operations.

It is important to acknowledge concerns about the industrial decline. As with any measure of this scale, AfCFTA is not without downside risk for Nigerian businesses and its economy. Perhaps the biggest such risk associated rests on the fact that Nigerian businesses are hobbled by inadequate power and transportation infrastructure and may well suffer when exposed to the competition that a free-trade agreement fosters. Nigeria's policymakers would do well to focus on the root of the problem, not its manifestation. Rejecting the trade agreement in an attempt to the country's struggling manufacturing industry would be bound to impede economic growth.

In 1962, two years after successfully advocating for national independence, Nnamdi Azikiwe, Nigeria's first president, imagined that:

"by abrogating discriminatory tariffs, we create a free trade area over the entire continent and thereby expand the economy of all African countries involved, thereby raising living standards and ensuring economic security for African workers".

Indeed, the roots of the AfCFTA can be traced back to two bedrock conventions, the Lagos Plan for Action for the Economic Development of Africa (1980) and the Abuja Treaty Establishing the African Economic Community (1991). Perhaps Nigeria's policymakers should look to its history for a bold vision of its future.

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