Free trade area could boost Africa’s income by $450bn

If the African Continental Free Trade Area (AfCFTA) is fully implemented, it could boost regional trade income by $450 billion (or 7%), significantly improve wage growth for women and unskilled workers, and lift 30 million out of extreme poverty by 2035, according to a World Bank study.

“The agreement is a massive undertaking but if these countries are able to create a single market with a common set of rules, it would create a huge market both for African businesses to thrive and also to attract vast amounts of foreign investment,” says Maryla Maliszewska, senior economist in the World Bank’s Macroeconomics, Trade & Investment Global Practice.

The economic benefits of the free trade agreement would be even more important given the significant economic damage caused by the COVID-19 pandemic, which is likely to result in $79 billion in output losses for African nations in 2020. The pandemic has already caused substantial disruptions to trade on the continent, including for key goods such as food and medical supplies.

“We hope the results of this report give more impetus to the negotiations, especially now given the current pandemic and the devastating effects it’s having on African lives and livelihoods. We need to find ways to boost growth and trade will be a key driver of recovery,” says Maliszewska. There were several concerns about the FTA among African countries, some of them related to tariff revenue implications, which for some countries is a significant source of government revenue; and others to the distributional outcomes on sectors, with some likely to shrink and others expand. “But this study shows policymakers that overall the results would be overwhelmingly positive and offer a path out of the recession,” says Maliszewska.

The countries are still in the depths of the negotiations, and because of the pandemic talks have been postponed until the end of December. “Simply, the agreement is too huge, covering too many countries, for it to be negotiated online,” Maliszewska says. “This will delay the implementation by six months, but we have hope the countries will start trading on the reduced tariff rates as soon as there’s agreement on the tariff reductions. The trade facilitation measures should be able to be implemented quickly, but things like investing in infrastructure on the borders will obviously take more time.” Maliszewska estimates that although the whole agreement could take up to 15 years to implement, some key trade facilitation agreements could be put in place in the coming years.

Potential AfCFTA benefits

Most AfCFTA economic benefits are likely to derive from cutting red tape and simplifying custom procedures. The World Bank’s modelling suggests that tariff liberalisation and a decrease in non-tariff barriers, such as quotas and rules of origin, would increase the continent's income by $153 billion (or 2.4%). The remaining $292 billion would derive from trade facilitation measures that cut red tape, decrease compliance costs for exporters and importers, and ease the integration of African companies into global supply chains.

The pact would both expand key sectors and create brand new industries across the region. The economic gains would vary for each country, but those most likely to benefit are the nations with the highest trade costs; for example, Côte d’Ivoire and Zimbabwe would both grow their incomes by approximately 14%. The agreement would also lead to a substantial uptick in interregional trade, particularly in manufacturing.

Intra-continental exports would grow by 81% and exports to non-African countries would increase by 19%. AfCFTA would lead to large wage gains for the African population, particularly for women (an increase of 10.5% against 9.9% for men) and for unskilled workers (a rise of 10.3% compared to 9.8% for skilled workers). “The agreement would have a positive distributional effect for women and unskilled workers, which is certainly not a given with trade agreements,” says Maliszewska. “The sectors that would benefit the most would be certain service sectors that are more female labour intensive, like recreation, and agricultural sectors, which employ more unskilled workers. And there’ll be big output boosts for manufacturing sectors, like textiles, that heavily employ a lot of women and unskilled workers.”

Reaching a successful deal would require stringent legislation enabling goods, capital and information to flow freely across borders, says the report, and the countries willing to implement it will be able to attract foreign investment and competition, which would boost productivity and innovation from domestic companies. But local governments will need to prepare their workforces to take advantage of the opportunities with policies designed at reducing the cost of changing jobs.

Role for DFIs

DFIs also have a role to play, according to Maliszewska, helping to train negotiators and set up the permanent secretariat in Ghana, facilitating the dialogue with local private sectors, and providing financial support to ease the transition of the implementation in certain countries. “We’re working closely with Afreximbank, the WTO, and The United Nations Economic Commission for Africa (UNECA) to speed up the process,” she says. “We’re also developing a platform where international organisations can pool their support for the agreement so that there’ll be one unified approach.”

In the short-term, AfCFTA would cushion some of the negative economic side-effects of the pandemic by boosting regional trade and value chains. But down the line, the agreement would form the basis for broader integration of African countries. By replacing a patchwork of regional agreements, streamlining border procedures, and prioritising trade reforms, AfCFTA could help the continent vastly improve its resiliency against future economic shocks.

“It creates a platform for collaboration on a whole range of issues, because the structures and the common interests will be established,” says Maliszewska. “That could easily expand to collaboration on health, on food security, on climate change – the possibilities are endless.”