Introduction

CHAPTER 6 The Promise and Challenge of the African Continental Free Trade Area

Woubet Kassa, Habtamu T. Edjigu, and Albert G. Zeufack

Introduction

In January 2012, the 18th Ordinary Session of the African Union Assembly of Heads of State and Government decided to establish the African Continental Free Trade Area (AfCFTA) by an indicative date of 2017. The summit also endorsed the Action Plan for Boosting Intra-African Trade, which identified seven program clusters: trade policy, trade facilitation, productive capacity, trade-related infrastructure, trade finance, trade information, and factor market integration. The AfCFTA aims to bring together 54 African countries with a combined population of more than 1.2 billion people and a combined gross domestic product (GDP) of more than $3 trillion. The goal is to “create a single continental market for goods and services, with free movement of business persons and investments.”1

The draft agreement was signed in March 2018 during the 18th Extraordinary Session of the African Union Assembly of Heads of State and Government, where 44 of the 55 African countries signed the treaty. As of 2021, 54 countries had already signed the AfCFTA.2 Twenty-two ratifications were required for the agreement to enter into force—a feat achieved as of May 2019—and 38 African Union member states have ratified it as of August 2021. Hence, Africa has put into operation the world’s largest free trade area (FTA), which is expected to change the trade and investment framework of countries in the region.

The key objectives of AfCFTA include the following:3 • Create a single continental market for goods and services, with free movement of businesspersons and investments, and thus pave the way for accelerating the establishment of a Continental Customs Union. • Expand intra-Africa trade through better harmonization and coordination of trade liberalization and facilitation regimes and instruments

across regional economic communities (RECs) and across Africa in general. • Resolve the challenges of multiple, overlapping REC memberships and expedite regional and continental integration processes. • Enhance competitiveness at the industry and enterprise levels by exploiting opportunities for scale production, continental market access, and better reallocation of resources.

Although intraregional trade still accounts for only a small share of total trade in Africa, it is becoming increasingly important. The push for regional integration is currently fostered by the AfCFTA’s potential to significantly advance economic transformation in the region. The establishment of the AfCFTA presents both major opportunities from and challenges to boosting intra-Africa trade. As a part of the AfCFTA agreement, countries have committed to remove tariffs on 90 percent of goods in the first five-year phase, followed by subsequent elimination of tariffs on the remaining product groups as well as reduction of nontariff barriers (NTBs).

Following the operationalization of the AfCFTA, intra-Africa trade would increase by 52.3 percent in 2022, relative to a baseline scenario in 2022 without AfCFTA implementation, with the manufacturing sector registering the largest expansion in exports (by about 53.3 percent), higher than agriculture or services (Mevel and Karingi 2012). A more conservative estimate suggests that, in the long run, full AfCFTA implementation (without exemptions of certain sensitive products from liberalization) will likely increase intra-Africa trade by 33 percent owing to the elimination of tariffs, and cut Africa’s trade deficit by 51 percent (Saygili, Peters, and Knebel 2018). By 2035, with full AfCFTA implementation, intra-Africa trade is estimated to increase by 81 percent compared with the baseline scenario without AfCFTA for the same year. Further removal of NTBs is associated with an even larger increase in intraregional trade.

The removal of tariffs will create a continental market that allows companies to benefit from economies of scale. By promoting intra-Africa trade, the AfCFTA will also foster a more competitive manufacturing sector and promote economic diversification. In turn, the region’s countries will likely be able to accelerate their industrial development.

In addition, the AfCFTA could enhance economic growth and create welfare gains. Using a computable general equilibrium model (CGE) model, Saygili, Peters, and Knebel (2018) estimate that full elimination of tariffs among African countries would increase GDP by about 1 percent on average and create an overall welfare gain of about $16.1 billion in the long run.4 These growth and welfare gains could be even larger if the scope of the agreement is extended to nontariff measures (NTMs) and trade facilitation (“the simplification, modernization, and harmonization of export and import processes,” as defined in WTO [2015, 34])—the key drivers for economic growth in the region (Chauvin, Ramos, and Porto 2016). They estimate that the elimination of tariff barriers combined with reduction of