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Tuesday, 19 November 2019

Correctly implementing AfCFTA could unlock USD 3 tn-worth of growth across the continent

Correctly implementing the African Continental Freetrade Agreement (AfCFTA) could unlock USD 3 tn-worth of growth across the continent, Baker McKenzie says. According to research from the law firm and Oxford Economics, countries need to double down on eliminating limitations related to infrastructure, resources, and other regional trade agreements that might undermine the efficiency of the continental agreement. AfCFTA, which came into force on 30 May, will create one of the world’s largest trade areas and aims to boost intra-regional trade, eliminating 90% of tariffs and allowing goods and services to move freely on the continent. The agreement also promises to increase intra-African trade by 52.3% and bring more FDI — which currently stands at less than a tenth of what goes into Asia — by offering would-be investors access to economies of scale and making export processes easier.

The agreement could also help prop up manufacturing GDP in Africa, and reduce African countries’ reliance on importing manufactured goods from Europe, China, and India, the research indicates. As it currently stands, the bulk of Africa’s exports are raw materials and other natural resources, while imports are concentrated in manufacturing products, industrial machinery, and transport equipment. Intra-African trade of manufactured products is weak and is largely comprised of re-exported goods originating from outside the continent, signaling that “African nations do not trade more with each other because of a misalignment between what various African countries need and what is produced on the continent,” says Virusha Subban, a partner at the law firm focused on customs and trade.

Growth across Africa from the agreement is doomed to be inequitable: Some countries in the continent appear to be in a better starting position to capitalize on the benefits of the agreement, the research shows. Countries that already have trade integration with neighboring countries and those with open economies stand to gain the most. Egypt, for example, has a “very limited” trade relationship with its African peers, despite having a much larger economy than others. “The results of our analysis show countries that have already been bold enough to create more open, business-friendly environments stand to make the biggest gains. The message should be that freeing up trade is going to be the big engine of African growth through the 2020s and the first movers have the biggest advantages,” says Baker McKenzie Partner Mattias Hedwall.

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