The year 2019 marks a memorable period in the history of African trade with the entry into force of the African Continental Free Trade Agreement (AfCFTA). The agreement establishes the largest free trade area in the world since the creation of the World Trade Organisation in 1995.
AfCFTA will cover more than 1.2 billion people and over $3 trillion in GDP. It creates a myriad of opportunities for entrepreneurs across the continent and has the potential to enhance competitiveness, promote industrial development through diversification and regional value chain development as well as sustainable socio-economic development and structural transformation.
The scale of AfCFTA's potential impact makes it vital to understand how to harness its opportunities and overcome its risks and challenges. Africa's success at augmenting economic prosperity for all on the continent will depend critically on its capacity to transform the AfCFTA into a catalyst for structural change and prosperity.
The agreement comes at a critical moment for Africa. For centuries Europe, the US, and more recently China have stripped the continent of its raw materials. Today, the majority of Africa's external exports are extractives, namely oil and minerals.
Increasingly, African nations hoping to secure sustainable economic growth are shifting away from the volatility associated with extractive exports towards industrialised goods. While overall intra-African trade is miniscule, 42 per cent of it consists of industrial goods and this number is expected to grow under AfCFTA.
A focus on industrial goods promotes African industrialisation and the advancement of its manufacturing sector, providing more employment opportunities for the continent's booming youth population. Despite growing trade tensions globally, Africa has never been better positioned as a prime successor to become the manufacturing hub of the developing world.
Today, only 15 per cent of African exports go to other African countries, compared with intra-trade levels of 61 per cent in Asia and 67 per cent in Europe. High tariffs and colonial-era infrastructure make it easier for African countries to export to Europe, Asia or the US than to each other.
At the same time, overlapping membership in Africa's Regional Economic Communities hinders trade standardisation and enforcement. The share in total trade in Africa shows deepening levels of integration in Southern African Development Community (84.9 per cent), Comesa (59.5 per cent), the Community of Sahel-Saharan States (58.4 per cent) and Economic Community of West African States (56.7 per cent).
AfCFTA by contrast establishes a single continental market for goods and services, seeking to increase intra-African trade by cutting tariffs by 90 per cent and harmonising trading rules at a regional and continental level.
If fully implemented, AfCFTA could unlock significant growth opportunities, particularly for countries that are better placed to reap the rewards of intra-regional trade. In turn, if these gains can be shared more broadly continent-wide, the tangible benefits of AfCFTA will be manifest to all Africans.
Countries with good trade integration and open economies are most likely to benefit economically from lower trade tariffs. However, there are still critical obstacles before the agreement can be fully implemented and have tangible benefits for all concerned parties.
Why Rules of Origin matter
First, AfCFTA needs to get Rules of Origin right. Essentially, rules of origin, the set of technical requirements that define goods' eligibility for zero tariff on imports in a Free Trade Area, are a passport for goods. They are at the cornerstone of what it means for goods to be labelled "Made in Africa."
Unctad's 2019 Economic Development in Africa Report, titled Made in Africa: Rules of Origin for Enhanced Intra-African Trade demonstrates that the rules of origin are the critical policy tool needed to make any Free Trade Area operational in order to boost trade, in a more inclusive manner.
The rules of origin define the conditions that firms must comply with in order to authenticate that their goods originate from the Free Trade Area and are thus eligible for preferential treatment within the area.
AfCFTA must provide real trade preferences to its members that can be used by African firms through supportive rules of origin that are well designed, transparent, and easy to implement. This will help build viable African value chains in industries like tea, cocoa-chocolate, cotton-apparel, beverage, cement and automotive, getting African firms to trade more with each other, while also gaining more from trading with the rest of the world.
Infrastructure and connectivity
While increasing intra-Africa regional value chains is necessary, African countries also need to increase their current marginal share in global exports. Increasing African exports will contribute to economies of scale, create decent jobs, and serve as a source of international learning to improve productivity. However, this will require significant investment in productive capacity and has significant political implications.
AfCFTA must not be constrained by infrastructure deficits and the fragmentation of supply chains. The vast infrastructure gap in Africa, including transport and utilities infrastructure, must be urgently addressed so as not to restrict increased trade integration.
Currently, African countries are not sufficiently investing in connectivity and infrastructure, which significantly hampers regional trade. To reverse this pattern, a massive and strategic investment in connectivity and infrastructure is essential. The harmonisation of regulations related to different sectors is needed to foster trade and a conducive business climate.
One reason for the lack of adequate investment in infrastructure and connectivity is that Africa's development banks remain undercapitalised and trade finance for African SMEs is limited. For example, East African Development Bank only has assets of $390 million.
The Development Bank of Southern Africa is the largest with $5.3 billion dollars and even the regional AfDB is small compared with other regions, loaning $20.3 billion compared with $95 billion for Asian Development Bank or $82 billion for Inter American Development Bank.
If African governments are serious about financing the regional infrastructure and SME investment needed to make AfCFTA a game-changer they need to mobilise the continent's financial resources without increasing the risk of debt distress.
There is no universal recipe for industrialisation. African countries need to design their own economic development strategy and industrial policy that fits their unique circumstances.
However, African countries may be able to benefit by focusing on learning from other successful regional economic systems and benefiting from the latecomer advantage. A pragmatic approach to evidence-based policy-making will create better outcomes. Learning from the experiences of other regions and policy dialogue among African countries is especially important.
The AfCFTA will give African countries preferential access to the most economically dynamic region. It is important to be realistic about time frames, however, we must ensure that the right systems and partnerships are put in place to reap the benefits of the AfCFTA, one of the world's most exciting new global trading zones.
Dr Mukhisa Kituyi is the Secretary General of the United Nations Conference on Trade and Development