Africa made history this year as the agreement establishing the African Continental Free Trade Area (AfCFTA) officially entered into force. As trading under the AfCFTA starts on July 1, 2020, with a market of over a billion people and income of about $3 trillion, the big question is whether the new free trade area will lead to one big African market.
Already, the AfCFTA has energised the continent by positioning regional integration front and centre. By requiring member states to remove tariffs from 90 per cent of goods, the agreement is expected to boost trade among African countries from its low level of 16 per cent. The Economic Commission for Africa estimates likely trade effects of over 50 per cent.
Yet, lowering tariffs further will not be the magic bullet. Overcoming non-tariff barriers is key. Here are factors to facilitate one big African market.
Regional Economic Communities (RECs): Africa's regions have many RECs with overlapping memberships, including the Common Market for Eastern and Southern Africa and the East African Community. These RECs are at different stages of integration. The AfCFTA aimed to consolidate them into one entity. That did not happen. AfCFTA's Article 19(2) states that "members of a regional economic community that have attained higher levels of regional integration than under the AfCFTA, shall maintain such higher levels among themselves". This provision mandates trade liberalisation to follow different paths, not one single market.
The signatories recognise the problem of many overlapping RECs. At their July summit meeting, they asked the Secretariat, AU Commission and the RECs to resolve the matter. No time frame was agreed on. Unless eliminated, the co-existence of many RECs with the AfCFTA will hamper the attainment of one big African market.
Non-tariff barriers: Trade in many RECs is virtually tariff-free. Lowering tariffs further will boost trade, but only a little. That's because of all world regions, Africa has the highest non-tariff trade costs. For example, within the EAC, air passenger fares, bus fares, and cargo truck charges are high. Overcoming non-tariff barriers is essential for successful integration.
Global experience shows that geography matters for international trade and with improved transport infrastructure, countries within close proximity to their regional partners have demonstrably higher levels of trade and integration compared with countries that are far apart. Reaping the benefits of the AfCFTA requires strong commitment to improve the quality of cross-border infrastructure given that so many African countries are landlocked.
Specific projects include highways, railways, airports and broadband cables. The Programme for Infrastructure Development in Africa has done many studies in these sectors. For example, its transport plans envisage major highways across Africa, from Cape Town to Cairo and from Mombasa to Lagos. Improving the quality of Africa's infrastructure and connectivity would greatly reduce the costs to trade that are currently the world's highest. The barriers stifle competitiveness within Africa and with the rest of the world.
Business environment: Considerable disparity exists between Africa's top performers and the laggards regarding ease of doing business. In the World Bank's 2020 Doing Business rankings, only 10 African countries ranked among the top 100 best-performers: Mauritius (13), Rwanda (38), Morocco (53) and Kenya (56). Conversely, 34 African countries are among the bottom performers.
One indicator that measures the costs of trading across borders merits attention. Inordinate delays to clear Customs are expensive for both exporters and importers. For example, Morocco's introduction of e-payment of port fees has reduced delays. But Liberia fell in the rankings as it introduced new burdensome requirements on traders. A concerted Africa-wide move to e-customs will greatly boost trade.
To attain one big African market under the AfCFTA would require co-ordinated reform efforts to reduce non-tariff trade costs, including clearance procedures at the borders. This can be partly achieved by taking advantage of WTO's Trade Facilitation Agreement to provide poorer countries with financial support to improve trade facilitation.
As Africa becomes more integrated, there will be huge opportunities for companies in sectors like retail, telecoms, banking, mining and agriculture. This will boost investments (domestic and foreign) because Africa offers low labour costs, has abundant natural resources and a rapidly growing population.
There are tremendous benefits from one big African market. Further tariff reduction is not the answer especially as trade within many regions is virtually tariff-free. Moving forward requires addressing the overlapping RECs and eliminating non-tariff barriers. These constitute the greatest impediments to the attainment of a single African market. Effort to reduce these barriers is the surest way to boost trade and investment, to create jobs for the burgeoning population of youths, and to bring about prosperity in Africa.
Aloysius Uche Ordu is the managing partner, Omapu Associates. He is a former vice president of AfDB and a former director of World Bank